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FINANCIAL CHAPTERS 
OF THE WAR 



FINANCIAL CHAPTERS 
OF THE WAR 



BY 
ALEXANDER DANA NOYES 

AUTHOR OF "forty YEARS OF AMERICAN FINANCE" 



NEW YORK 

CHARLES SCRIBNER'S SONS 

1916 






Copyright, 1916, by 
CHARLES SCRIBNER'S SONS 



Published September. 1916 




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PREFACE 

The purpose of this book is to describe clearly, 
and explain without technicality, the remarkable 
financial and economic episodes which have at- 
tended the European War. The general public 
understood perfectly, from the very first days of 
the conflict, that its economic results were cer- 
tain to be as momentous as its political results. 
But the most experienced financiers were at loss 
to say beforehand what the financial character 
of the war would be. When it began, they found 
it equally impossible to measure the real signifi- 
cance of the first economic occurrences. It is 
hardly surprising, therefore, that the general pub- 
lic shoiild have been unable to understand what 
had actually happened. Financial events were in 
fact so extraordinary and complicated as to leave 
the mind of many readers of the news in complete 
bewilderment. 

It is my hope that these chapters may serve to 
clear up that perplexity. Perhaps no questions 
have been asked more frequently since July, 19 14, 
than the questions how the fighting nations have 
been able to raise the $100,000,000 per day which 



vi PREFACE 

they are spending on war ; why the seemingly con- 
vincing prophecy of the shortening of war be- 
cause of economic exhaustion has not been ful- 
filled; what was the meaning of that "deprecia- 
tion in the foreign exchanges" of which we have 
heard so much; whether Europe has lapsed into 
irredeemable paper currency like that of our Civil 
War; by what means the United States — ^largely 
dependent on Europe, in a financial way, before 
the war — should so suddenly have acquired the 
power of paying off its foreign indebtedness, fi- 
nancing neutral nations from its own resources, 
and lending even to belligerent Europe larger 
sums than Europe itself had raised for its earlier 
wars. Along with these considerations came the 
further inquiries : Is this American war-time pros- 
perity -unreal, temporary, and fictitious ? Will the 
conditions of 191 5 and 1916 be instantly reversed 
when war is over ? Has New York actually dis- 
placed London as the financial centre of the world ? 
On these questions I shall endeavor to throw some 
light. 

It would be presumptuous for any one to claim 
ability to answer all of them. One reason why 
this book bears its present title, instead of being 
described as a financial history of the war, is that 
the actual and relative importance of many eco- 
nomic phenomena of the period cannot be deter- 
mined conclusively until the war itself is over. 



PREFACE vu 

But it is possible at least to give to the general 
public the means of understanding exactly what 
has happened already. Every reader of history 
will agree with me that the lack of clear contem- 
poraneous exposition of the financial events of our 
own war from 1861 to 1865, or, even more par- 
ticularly, of the great Napoleonic wars, is one of 
the greatest obstacles to the full historical com- 
prehension of those episodes. 

I have drawn freely in this book on my previous 
discussion of the same subjects in Scribner's Maga- 
zine, and have also utilized an article written by 
me last autumn in the Yale Review. But with 
the recent rapid movement of events, economic 
as well as military and political, it will readily 
be understood that all previous comment had to 
be rewritten, and that the greater part of this 
book should be made up of previously unpub- 
lished matter. 

A. D. N. 

New York, September, 1916. 



CONTENTS 



CHAPTER 



PAGE 



I. Precedent and Prediction . . i 

Financial consequences of a great European war, 
as the experts foretold them — ^The experience of 
other wars — Economic side of the American Civil 
War — Of the Napoleonic conflict — Analogies and 
contrasts — ^The world's mistaken expectations 
when this war began. 

11. The War Panic 20 

Outbreak of the war and the resultant financial 
situation — How far the markets were caught im- 
prepared — The world-wide economic crisis — Run 
on the Bank of England — Closing of the stock ex- 
changes — Suspension of gold payments — A week 
of financial chaos. 

III. Emergency Expedients ... 37 

Protective measures of financial Europe — ^The 
Bank of England rate — Nature of the crisis in in- 
ternational credit — ^The moratorium on debts — 
England's new paper currency — Guaranteeing 
non-collectible loans — The financial world on a 
war footing. 

IV. Financing the War .... 53 

Enormous cost of the conflict — Early expedients 
of the governments to raise money — European 
capital restricted to the war loans — England's 
new taxes and the attitude of Germany — ^The ques- 
tion of "economic exhaustion." 



CONTENTS 



V. Financial America and the War 75 

What results were expected in the United States — 
Our economic relations with the belligerents — 
Fear of a financial collapse — Europe's sales of 
American securities — Recall of foreign capital 
from America — The "emergency currency" — Na- 
ture of the New York crisis. 

VI. The New York Market's Action 06 

Question of meeting foreign obligations — Ameri- 
can bankers and the demands of Europe — Volim- 
tary gold exports in the face of panic — Passing of 
the financial crisis — Removal of the emergency 
expedients — The new banking system and its bear- 
ing on the situation — Reopening of the stock ex- 
change. 

VII. The Second Period . . . . 115 

Course of events preceding the economic changes 
of 19 1 5 — Incidents in European finance — Accu- 
mulation of gold by belligerent governments — 
The gold imports at New York and their cause — 
Wheat crop of 1914 — Spectacular movement of 
foreign trade — New York as a world money centre 
— The great revival of American prosperity. 

VIII. Currency Inflation . , . . 144 

Paper-money issues of England and the Conti- 
nent during the present war — Reasons for exces- 
sive issues in war time — ^The disputed question of 
depreciation — The United States and its new cur- 
rency — "Federal Reserve notes " and the Ameri- 
can money supply. 

IX. The Foreign Exchanges . . . 163 

Meaning of depreciation in exchange rates — The 
extraordinary fall in New York exchange on Eu- 



CONTENTS xi 



rope — Influence of our export trade — Of the shift- 
ing of capital to America — London's gold exports 
to New York — The $500,000,000 Anglo-French 
loan — British Government and English investors 
in American securities. 

X. When the War Ends .... 184 

Futile suggestions for peace negotiations — Atti- 
tude of American markets toward the question — 
Our financial interest in continuance of war or re- 
turn of peace — Political and economic sequel to 
other wars — ^The world after other great inter- 
national conflicts. 

XI. The Economic Aftermath . 198 

Belligerent Europe when the war is over — Finan- 
cial future of France — Of England — Of Germany — 
London and the "World Market" — Relations of 
the European states — The question of an eco- 
nomic war between Germany and the Allies. 

XII. Europe and America . . . . 227 

Uncertainties as to our own financial outlook on 
return of peace — ^The question of "Preparedness" 
— Post-bellum competition in the world's trade — 
Industrial Europe's predictions — Two sides to a. 
disputed question — New conditions of the eco- 
nomic future after this war. 

Index 245 



CHAPTER I 

PRECEDENT AND PREDICTION 

BEFORE the European War broke out, the 
most familiar answer of the banking com- 
munity, to predictions of such a war, was 
that the economic consequences would be so 
terrific as to deter any statesman or ruler from 
committing his country to them. After the fight- 
ing had begun, prediction was quite as general 
to the effect that the war must necessarily be 
short, because none of the belligerents would be 
able to endure the financial strain. In concrete 
terms, this forecast usually shaped itself in the 
statement that economic exhaustion could not 
fail to reach, by the end of 191 5 at any rate, so 
acute a stage as to compel the ending of hostil- 
ities. 

Both predictions we now know to have been 
entirely wrong, and they were not more promptly 
and completely refuted by the course of events 
than were the prophecies of specific phenomena, 
military or financial. These facts cannot well be 
ignored in attempts to forecast the still weightier 
problems which will arise on return of peace. 
Prediction of those later results, whether based on 



2 PRECEDENT AND PREDICTION 

experience of history or on particular circum- 
stances of the day, has no greater presiunption of 
inf allibiHty than the predictions of immediate re- 
sults in 1 9 14. Certainly no more baffling and be- 
wildering question has been presented for a cen- 
tury past, in the field of political and economic 
history, than the question what is to be the after- 
math of the present war. Politically, problems 
are involved of so complicated a nature that the 
forecast even of the most experienced European 
statesman could not be better than a guess. As a 
matter of fact, statesmen have risked no such pre- 
dictions, but have restricted themselves to general 
expressions of their hope or purpose, such as "the 
insuring of permanent peace in Europe" or "the 
ending of the burden of militarism." As to pre- 
cisely what measures would or could insure these 
wished-for consummations, on any supposition re- 
garding the military outcome of the war, the public 
men were silent. The post-bellum territorial read- 
justment, post-bellum conditions in the internal 
politics of the states now indulging in so imparal- 
leled sacrifice of blood and treasure, were sure to 
be powerful factors in determining the future; 
yet even as to these, we had only such vaguely 
formulated suggestions as the "realizing of Rus- 
sia's aspirations in the Bosporus," the "creation 
of an autonomous Poland," or the "recovery by 
France of her lost provinces." 



THE FORCES AT WORK 3 

As with the political sequel to the war, so 
with its financial and economic sequel. In both 
directions forces of incalculable magnitude had 
been set loose in this epoch-making conflict, and 
their effect on the political and economic structure 
of Europe was rendered more utterly novel a 
problem by the extremely complicated character 
which international relations of every sort have 
assumed in the past generation. When the ag- 
gregate daily military expenditure of the bellig- 
erent powers had become ten times as great as in 
any previous war of history ; when the European 
states, already bitrdened with the accumulated 
public indebtedness of the past half-century, 
doubled or trebled that debt within two years; 
when the mere annual interest charge on the 
new indebtedness may presently exceed the total 
yearly public revenue of the several belligerent 
states in the year before the war, it is scarcely 
surprising that the financial community itself 
should have listened to any theory promul- 
gated as to conditions after the war. Even in 
the plans and discussions of practical business 
men, this unknown future gradually assumed the 
aspect of something terrible because it was un- 
known. The formula of Preparedness, which 
very soon occupied a front place in legislative 
controversy, with neutral states even more than 
with belligerents, embodied the popular concep- 



4 PRECEDENT AND PREDICTION 

tion, not of conditions which must in the nature 
of things arise when the war is over, but of con- 
ditions which the imagination pictured as pos- 
sibilities. Seeing that high experts either dis- 
agreed diametrically in their predictions, or else 
confessed their inability to predict at all, it was 
perfectly natural that imagination should have 
drawn some startling pictures, yet that the pic- 
tures should have differed absolutely from one 
another. 

Financial as well as political observers had, it 
is true, the voluminous history of the world's great 
wars on which to base conclusions. Among other 
precedents, the financial sequel to the outbreak 
of our own Civil War was not without possible 
suggestions. Delegates from the seceding States 
had, on February 8, 1861, met at Montgomery 
and formed the Southern Confederacy. It was 
not, however, until after Lincoln's inauguration 
on March 4, when the certainty of war began to 
be recognized, that the banking crisis actually 
developed. In April banks at all the Northern 
cities temporarily deferred cash payments; in 
May the Southern banks suspended specie pay- 
ments altogether, and the new Confederate Gov- 
ernment officially forbade payment of debts by 
Southern to Northern houses. The Northern 
dry-goods trade fell into panic; merchants' paper 
being discounted at the banks for as high a rate 



WHEN OUR CIVIL WAR BEGAN 5 

as 3 per cent a month. Yet the crisis seemed to 
have been overcome until the gold of the country 
began to be rapidly drained away on export in 
the autumn. On December 17 the New York 
banks concurred in a formal resolution that the 
situation gave "no reason, justification, or neces- 
sity for a suspension of specie payments"; but 
less than a fortnight later they took precisely 
that action, and the country was soon committed 
to the irredeemable government paper currency, 
for which redemption in coin was not provided 
until seventeen years later, more than thirteen 
years after the ending of the war. 

One or two of these incidents had a bearing on 
the possible course of economic events in the 
European War, and we shall find some interesting 
analogy ia the manner in which, contrary to all 
prediction of financial markets, the enormous 
war loans of our Civil War were floated. But 
with those points of very general resemblance, the 
economic parallel ends. The war of 1861 was a 
purely domestic struggle; the commerce of the 
United States was imimpeded; we raised money 
freely by the sale of our new securities to the 
outside world. No real analogy with the circimi- 
stances under which this present war broke out 
could in fact be found, short of the Napoleonic 
conflict of a century ago. Twelve nations were 
simultaneously at war in 181 5; twelve were at 



6 PRECEDENT AND PREDICTION 

war exactly a hundred years later; nothing ap- 
proaching a contest with such scope had occurred 
in the intervening period. In none of the wars 
since Waterloo had campaigns been simultane- 
ously fought by European colonists on other con- 
tinents, and in remote parts of the world. In 
none of them had sea fights on the coast of 
South America or Australia divided interest with 
battles in the centre of Europe. 

At the very beginning of the present war was 
duplicated that episode which has so often seemed 
incredible, and which even the historians describe 
as a "barbarous decree" — Napoleon's seizure and 
imprisonment, for a dozen years after his dec- 
laration of war in 1803, of 10,000 English tour- 
ists and residents in France. The struggle of 
the small neutral states of Europe, after 1805, 
between the upper and nether millstone of the 
powerful belligerents reads like a chapter from 
last year's history of southeastern Europe. Nel- 
son's bombardment of Copenhagen and its fleet 
in 1809, at an hour when Denmark was not at 
war with either side, but merely balancing be- 
tween alliance with the English or the French, 
can nowadays be better understood by those who 
have watched the recent predicament of Greece. 

For a hundred years, readers of history have 
looked back with astonishment to the 10 per cent 
tax levied on English incomes at the opening of 



ANALOGIES OF HISTORY 7 

the nineteenth century. To-day incomes of Eng- 
lish citizens pay 25 per cent and upward to the 
government. "Pitt's subsidies" have reappeared 
on an immensely expanded scale in the $1,500,- 
000,000 advanced for war purposes by England 
to her allies in a single twelvemonth. Since 
July, 1 9 14, the world has again, for the first time 
in more than a hundred years, seen captured 
cities in the heart of Europe deliberately given 
to the flames, citizens held for hostage, tribute 
imposed on non-resisting towns occupied by the 
enemy — occurrences which were supposed, with 
the civilized world's formal adoption of a hu- 
mane code of international relations, to have 
been relegated to the limbo of other centuries. 
Even the chapter in the story of Napoleonic Paris 
at which later generations have smiled — the hys- 
terical outcry over the "English lies" to which 
was ascribed unpleasant news about the war — 
has been reproduced to an admiring world by 
twentieth-century Berlin. 

In no respect was the parallel more startling 
than in the great collision over the rights of neu- 
tral ships, which repeated, step by step, the 
story of the "Orders in Council," the "Berlin 
Decree," and the "paper blockades" of the Napo- 
leonic conflict. During the whole of 191 5 the 
greatest of the neutral Powers lived over again, 
with remorseless coincidence of causes and yet 



8 PRECEDENT AND PREDICTION 

with the most impressive contrast of circum- 
stance, the long series of episodes which led up 
to our War of 1812; the historical parallel lying 
not only in the fact of two European antagonists, 
in the earlier period, interfering with our com- 
merce in order to injiire one another, but in the 
further fact that both of them on that occasion, 
like one of them in the present instance, con- 
ditioned their own suspension of unlawful attacks 
upon our vessels on our government's inducing 
the other belligerent to stop blockading its Eu- 
ropean enemy — a proposal of which President 
Madison, anticipating President Wilson's atti- 
tude, bitterly remarked to Congress that it was 
tantamount to "asserting an obligation on a neu- 
tral Power to require one belligerent to encourage 
by its internal regulations the trade of another 
belligerent." With political, military, and finan- 
cial events repeating with such dramatic accuracy 
the story of the Napoleonic wars, it might surely 
have been assumed that even the economic his- 
tory of the present war, during the period of hos- 
tilities and afterward, might have been foretold 
from the records of a century ago. 

One reason, recognized from the very start, 
why this process of analogy was boimd to fail, lay 
in the prodigious cost of war to-day. As to what 
that cost would be, political statisticians and 
military experts had for years been busy estimat- 



THE COST OF MODERN WAR 9 

ing. Out own War of Secession cost the United 
States Government $1,000,000 per day in its 
early stages and $3,000,000 daily during and after 
1863. An official French report of January, 187 1, 
reckoned the current daily expenditure of France 
for the war with Prussia at $3,200,000. The little 
Transvaal War, lasting from October, 1899, to 
June, 1902, cost England $1,085,000,000, or a 
million dollars a day. Japan and Russia spent 
between them $3,500,000 daily on the Manchurian 
War of 1904. When the question of a possible 
"general war" came into anxious controversy in 
the last-named year, a well-known French stat- 
istician, M. Jules Roche, calculated that in a 
conflict involving two or three great Powers the 
average daily cost for all combined would be 
about $6,000,000, but that a war in which France, 
Russia, Germany, and Austria were all engaged 
would cause a total average expenditure, for 
purely military purposes, of $18,000,000 per day. 
The somewhat earlier estimate of an Austrian 
economist had figured that participation in a 
European war would cost France $5,100,000 per 
day, Russia $5,600,000, Germany $5,000,000, and 
Austria $2,600,000. In 1913, when the Balkan 
War once more revived speculation as to the pos- 
sibilities of a general conflict. Doctor Charles 
Richet, of the University of Paris, on the basis of 
a very elaborate calculation, estimated that if 



lo PRECEDENT AND PREDICTION 

Germany, England, France, Russia, Italy, Aus- 
tria, and Rumania were all to engage in war, the 
actual average expense of the campaign per day 
would be $54,100,000. This estimate, it will be 
observed, came very close to naming the actual 
belligerents of 19 14. Even when republished at 
the outbreak of the present war, the figure was 
commonly regarded as incredible. Yet exactly a 
year after hostilities had begim, the German im- 
perial chancellor told the Reichstag that the daily 
cost, to all the Powers involved, was $75,000,000. 
The daily expenditure of England and Germany 
alone in the middle of the present year was greater 
than Doctor Richet's estimated outlay for all seven 
belligerent Powers, and the estimate of inter- 
national bankers in June, 19 16, as to the total 
daily outlay by all the European belligerents com- 
bined, was $103,000,000. 

Now, the average daily cost to England of the 
entire Napoleonic War was less than $2,000,000, 
as against the $25,000,000 average which it has 
reached this present year. It is true that the 
national wealth has increased at an almost equal 
rate. But, on the other hand, when Pitt placed 
his 10 per cent tax on English incomes in that 
earlier period there had been no income tax at all 
in England, whereas English incomes, early in 
19 14, were already paying what was traditionally 
called a "war rate" of taxation. The cost of war 



IN THE DAYS OF NAPOLEON ii 

to Napoleon was trifling compared with the ex- 
penditure of continental belligerents to-day. It 
was possible for him to tell the Directory at Paris 
that the $4,000,000 "contribution" imposed on 
Lombardy in his Italian campaign, and the $2,- 
400,000 exacted from Parma and Modena, had 
paid the cost of war. The $8,000,000 indemnity 
exacted from Vienna after Austerlitz came very 
near to serving a similar purpose in the campaign 
of 1805. The imitation of this procedure hy the 
German generals, in their Belgian campaign of 
1 9 14, was not even mentioned at Berlin as a help 
toward paying war expenses. It had no effect 
whatever, except to expose the authors of the 
^ cruel exaction to the scorn and contempt of the 
outside world. 

But the vastly larger cost of present-day war- 
fare was not the only consideration which pre- 
vented drawing of confident analogies from the 
economic results of war a century ago. When the 
treaty of Amiens between France and England 
was broken in 1803, international finance and in- 
ternational foreign trade were in their infancy. 
Judged by its scope and methods of to-day, for- 
eign commerce was conducted in a fashion which 
may fairly be described as primitive. Inter- 
national banking and investment were hardly in 
their beginning; the house of Rothschild, for ex- 
ample, dates its origin from the days of disordered 



12 PRECEDENT AND PREDICTION 

continental finance and great English public loans 
which came with the Napoleonic wars. No bel- 
ligerent state, therefore, was confronted with 
enormous sales, on its stock exchanges, of secur- 
ities held in the enemy markets. As a matter of 
fact, the London Stock Exchange remained open 
during the whole of the Napoleonic wars ; not even 
such precaution as arbitrary "minimtmi prices" 
was imposed by government. The price of Great 
Britain's 3 per cent consols did indeed decline 
from 80 or 90 to the neighborhood of 50; but it 
was lowest at the beginning' of the war. There- 
after, notwithstanding the then unprecedented 
output of new government securities by England, 
the price of consols rose and fell purely in response 
to news from the campaign; in general, the price 
was considerably higher than at the beginning of 
hostilities. 

Government bonds were indeed almost the only 
quarter in which the rapidly accruing capital of 
Europe could be invested; at London, the only 
alternatives of real importance were the very 
limited field provided by shares of the Bank of 
England and the East India Company, and the 
very speculative and precarious field provided by 
joint-stock ventures in merchant ships and car- 
goes. The extremely intricate problem, created 
in 1 9 14 by the enormous mass which every strong 
belligerent country held of securities and floating 



OLD-TIME WAR EXPERIENCES 13 

loans of foreign, including enemy, communities, 
did not therefore exist at all. But, on the other 
hand, the strain on the gold reserves of the fight- 
ing nations was most formidable. At London al- 
most the first financial event in the long French 
war of a century ago was suspension of gold pay- 
ment on its circulating notes by the Bank of 
England. An open premium of 20 to 40 per cent 
on gold was the necessary consequence; then a 
discoimt of 16 per cent or more on English drafts 
presented in the foreign exchange markets of such 
great commercial cities as Amsterdam and Ham- 
burg. 

Merchant vessels sailing for other destinations 
than these banking centres carried gold and silver 
in their strong boxes, and, though they commonly 
moved in convoy, escorted by ships of war, they 
were the rich prizes of the maritime campaign. 
An extensive smugglers' trade, with headquarters 
in the Channel Islands, largely defeated the block- 
ade of France and its possessions by the British 
fleet. One of the incidents of that war was the 
establishment, from the unguarded seaports in 
Finland or Dalmatia, of a land route through 
which, in wagons or sledges drawn by relays of 
horses, contraband merchandise was carried from 
England across the Continent to Germany and 
France — at a cost said to have been fifty times the 
freight rate, then existing, from London to Cal- 



14 PRECEDENT AND PREDICTION 

cutta. In short, the confusion into which the 
present war plunged international finance, di- 
rected itself a century ago to ocean trade. Such 
international banking problems as existed were 
created wholly by this exchange of merchandise. 
When the British Government, dining the Na- 
poleonic wars, paid its famous subsidies to the 
German states, the most efficient means of doing it 
was found to be through a three-cornered opera- 
tion, based on the foreign trade of the United 
States. With neither of the great belligerents in 
control of the sea, and with French and English 
frigates cruising along the ocean routes to cap- 
ture enemy merchant ships, the merchants of 
neutral America, whose export trade in products 
of the United States was small, developed a 
lucrative business in carrying West Indian prod- 
ucts to England and continental Europe and 
bringing back English manufactures for home 
consiimption. On the English markets, these 
merchants bought far more than they sold; on 
the Continent they sold far more than they 
bought. The British Government therefore 
bought from the London merchants their claims 
on American importers and sent them to the 
German money markets, where the American 
traders' claims on German merchants were ac- 
cepted in payment; such mercantile drafts on 
Germany being then used for payment of the 



WHAT WAS EXPECTED IN 1914 15 

British exchequer's subsidies to the German 
princes. 

It was not difficult to see, even in August, 19 14, 
how httle of sure analogy as to probable economic 
results in the new European War could be based 
on these experiences of the last great conflict of a 
similar scope. The immense expansion of inter- 
national trade and banking which had marked 
the century since the battle of Waterloo; the 
complete change which had occurred in the in- 
vestment of capital; the enormously complicated 
machinery of debits and credits, assets and lia- 
bilities, as between all of the great financial mar- 
kets — these were aspects of the situation such as 
could only confuse and bewilder the financial 
mind. It was perfectly evident when this war 
began that, whatever were to be the actual eco- 
nomic phenomena created by it, they would not 
be the comparatively simple problems of 1793 
and 1803 and 18 12, but something vastly more 
difficult for the financial markets to surmoimt 
without world-wide collapse of credit. 

Since, then, we have seen how little light history 
could throw on the probable economic events of 
the war of 19 14, it will be interesting to inquire 
what experienced financiers expected to occur 
as an immediate consequence of its outbreak. 
Minds of the greatest bankers, in every market of 
the world, had been absorbed in this question for 



i6 PRECEDENT AND PREDICTION 

a generation. Despite their incredulity as to the 
willingness of any government to provoke such a 
war, the possibility was never absent from their 
calculations. The largest financial interests in 
the world were at stake in their judgment as to 
the immediate economic sequel. 

The question, what results they actually looked 
for, is not at all difficult to answer. It was well 
understood beforehand that, in the economic as 
well as in the military field, forces would be called 
into play such as would test with the utmost 
severity the financial endurance of the belligerent 
communities. But, as regards specific results, the 
coiu-se of events in the world's economic history 
since the war began, as in the strategy of the war 
itself, has been a chapter of surprises. With a 
single exception — the French calculation, already 
referred to, that a war involving six European 
Powers would cost at least $50,000,000 per day, 
which has been more than realized — every predic- 
tion of the immediate financial and economic se- 
quel hit wide of the mark. 

First, general insolvency would be inevitable, 
with bankruptcy of the most important inter- 
national houses — owing to the sudden embargo on 
collection of the enormous mass of credits out- 
standing to their account in other countries. That 
prophecy has not been fulfilled at all; there have 
been fewer of such bankruptcies, either in bellig- 



SIR EDWARD GREY'S PROPHECY 17 

erent or neutral states, than in an ordinary "panic 
year" like 1866 or 1873. Second, outbreak of 
general European war would break down inter- 
national trade completely; partly because of the 
crumbling away of credit, partly because of hos- 
tile navies on the sea. As late as July 23, 19 14, 
only a week before the German ultimatimis, Sir 
Edward Grey predicted to the British ambassador 
at Vienna that "if four great Powers — say Aus- 
tria, Russia, France, and Germany — engaged in 
war, the war would be accompanied or followed 
by a complete collapse in European trade and in- 
dustry." All of the designated great Powers, and 
with them England and Italy, have been for two 
years at war; yet, except for the foreign com- 
merce of Germany and Austria, the prediction is 
unfulfilled. The problem of the commercial world 
to-day is a problem, not of available supply and 
demand for merchandise in foreign trade, but of 
available ships to carry it. 

Third, liquidation of Europe's investments in 
neutral countries, with a view to raising money 
for the war loans, would proceed on such a scale as 
to force a 20 or 30 per cent break in the price even 
of American securities (of which the outside world 
held something like $4,000,000,000), with all the 
financial consequences which such sudden change 
in basic values would involve. With the un- 
precedented war-time output of new government 



1 8 PRECEDENT AND PREDICTION 

securities in Europe, demand on the whole world's 
investment capital would so immensely exceed 
available supply as to make this decline in exist- 
ing securities progressive, even in the markets of 
neutral states. The prediction has wholly missed 
fulfilment. Belligerent Europe has in actual fact 
sold back to the United States during the progress 
of the war more than $1,500,000,000 of American 
securities; yet prices for American stocks and 
bonds, after eighteen months of fighting, were 
higher than when the war broke out, and, instead 
of the predicted panicky break on the stock ex- 
changes, the second year of the European War 
was distinguished on the American markets by 
an exceedingly violent speculation for the rise. 

Finally — and this belief persisted during sev- 
eral months of the war itself — the wholesale re- 
call of belligerent Europe's capital from neutral 
markets, and especially the throwing back upon 
them of the securities previously sold by them to 
Europe, would result in drawing all the gold of 
neutral states into the European banks, with re- 
sultant collapse of bank reserves in such neutral 
markets, complete upsetting of their credit, and 
extreme advances in their money rates. None of 
the prophecies has been so amazingly falsified as 
this. Not only was the American market's im- 
portation of gold, in 1915, larger by $300,000,000 
than in any previous year of its history, with 



UNLOOKED-FOR RESULTS 19 

the inflow continuing during 19 16, but the accu- 
mulation of gold in such other neutral states 
as Holland and Sweden was so abnormally rapid 
that, reversing all previous financial practice, 
measures were actually taken by the banks of 
those two countries to discourage further imports, 
lest the mere fact of overflowing bank reserves 
should provoke unwholesome speculation. Re- 
serves of the American banks passed far beyond 
their previous maximum. As for the money 
market, New York was destined to be confronted, 
after 19 14, with one of the longest consecutive 
periods of extremely low money rates in its his- 
tory. 

Such was the series of erroneous and misleading 
expectations with which the whole financial com- 
munity of the world, and especially that of Eng- 
land, entered the period of war. It will now be 
our task to survey the actual course of economic 
events; to inquire why results imexpected by the 
most competent financiers actually came to pass 
and why the expected results did not, and then to 
see how far, on the basis either of past or present 
experience, we can map out the horoscope for the 
aftermath of war. 



CHAPTER II 
THE WAR PANIC 

WITH what spectacular suddenness the 
great European War, for whose possible 
occurrence financial Europe had during 
forty years been watching apprehensively, at last 
broke out at the end of July, 19 14, no one who 
lived through that period is likely to forget. 
The sense of incredulity; the insistence that such 
a thing was not possible in our time ; the final be- 
wildering whirl of events, remembered by most 
people only as a cloud of confusion until the Ger- 
man advance on Paris, with the French and Eng- 
lish armies retreating before the triumphant 
invader, emerged as a concrete fact — ^what aU 
this signified in America it signified in Europe 
also, and in the great financial markets of Eiu"ope 
as well as among the people at large. 

Except for a general sense that events crowded 
on one another's heels with such rapidity that the 
latest bulletin of the newspaper "extra" went far 
toward blotting out recollection of what had gone 
before, few people even to-day remember what 
actually happened in that period of confusion. 
This was, and is, as true of the financial com- 



ON THE EVE OF WAR 21 

munity as of the community at large. Austria's 
ultimatum to Servia created, in the hasty view 
of the reader of the despatches, the sense that a 
crisis had arisen which, because of its very gravity, 
must somehow be surmoiinted. In another week 
both Austria and Servia were lost to sight in the 
rush of larger consequences elsewhere on the map 
of Europe. For a single day the firing by the 
troops on the Dublin rioters seemed to be the 
event of paramount significance; then it was for- 
gotten for a year. The predicament of American 
tourists, imable to get away from the area of 
fighting, held the centre of the news for a period 
only a little longer. How slowly the compre- 
hension of what was actually happening swept 
over even the financial mind may be forcibly re- 
called by the episode of the North German Lloyd 
steamer Kronprinzessin Cecilie, whose departure 
from New York for a German port on Tuesday, 
July 28, with $10,000,000 gold on board, con- 
signed one-half to London and one-half to Paris, 
was discussed on Wall Street with more amuse- 
ment than concern, as proving the imreality of 
the talk of war, tmtil the news arrived of her sud- 
den turning back in mid-ocean and of her race to 
reach an American port before the English cruis- 
ers should intercept her. 

The French invasion of Lorraine; the declara- 
tion of war by England, at which, somehow, no- 



22 THE WAR PANIC 

body seemed to be surprised; the expectant wait- 
ing for an Anglo-German sea fight; the general 
confidence in the Belgian army's resistance; the 
vague expectation of another epoch-making battle 
on the historic field of Waterloo ; the early details 
of the German army's outrages; the fall of Na- 
mur and Brussels and the swift forward move- 
ment of Von Kluck — ^no such bewildering pano- 
rama had been presented to the eyes and mind 
of this generation. Only when the American 
community awoke to its full discovery of the 
powerful and unanimous sentiment of abhorrence 
at the German Government's performances — a 
sentiment destined to grow vastly stronger as the 
war progressed — did oiu* own people begin to see 
the chapter of events in its true relations. To the 
great financial markets, usually the keenest and 
most accurate judges of the meaning of events, 
this awakening to the facts of the situation 
brought, first, a practically unanimous conviction 
that, with England ranged on the side of France 
and Russia, Germany's ultimate defeat was cer- 
tain, and that therefore every German victory 
must be considered a calamity, not only because 
of the methods and practises which it might 
seem to vindicate, it meant prolongation of the 
war. But even before arriving at this positive 
conclusion (from which Wall Street has not turned 
at any subsequent moment of the war) the finan- 



CAUSES FOR THE CRISIS 23 

cial markets had to pass through what was un- 
questionably the most formidable panic of history. 

Financial panic, as defined by all previous ex- 
perience, arises from one or more of four main 
causes — doubt over the solvency of great fidu- 
ciary institutions; sudden withdrawal of the 
credit on which business men were relying for 
their ordinary engagements; acute apprehension 
of a collapse in value of investments ; or complete 
loss of confidence in the currency. The first, if 
not immediately checked, leads to runs of de- 
positors on banks, to a frantic call by creditors 
on debtors, and to stopping of payments; the 
second to a desperate struggle of merchants and 
bankers to realize on their assets; the third to 
wholesale cancellation of loans based on stock 
exchange securities; the fourth to such hoarding 
of gold as causes the actual circulating money of 
a whole community to disappear. As we shall 
see, and as was quite inevitable from the nature 
of the crisis of 1914, all four causes operated in- 
stantly and on a scale never previously witnessed 
in financial history. 

The great panics of the past have been violent 
in their immediate phenomena, in proportion as 
the shock caught financial markets off their guard 
and without a chance to adopt precautionary 
measures. They have been destructive in their 
economic results, in proportion as it was difficult 



24 THE WAR PANIC 

to remove the real cause of alarm, or to obtain 
for one hard-pressed community the help of others 
which had escaped the panic. The panic of 
August, 1914, arose from the European War it- 
self, whose formidable consequences were only 
beginning. Every market in the world fell under 
its immediate influence; instead of financial relief 
obtained from foreign countries each panic- 
stricken community was confronted by the most 
urgent measures elsewhere to prevent such re- 
course. Above all, the shock of war and war 
panic came on an almost completely unprepared 
and unsuspecting business world. 

That no such news as that of July 31 could 
possibly have been anticipated by the German, 
French, or English financiers, the $10,000,000 gold 
shipment of the 28th was striking proof. But 
there is other evidence to the same effect. What 
purposes were secretly entertained by the Austrian 
cabinet and the German general staff, during the 
two or three weeks (and possibly the two or 
three years) before the declaration of war, will 
probably remain a matter of dispute when the in- 
side history of this war is being written half a 
century hence. The diplomatic communications 
published by some of the belligerent countries, the 
obvious suppression of diplomatic documents by 
others, and the later disclosures by Italian states- 
men of the diplomatic suggestions of 1913, cer- 



ATTITUDE OF THE MARKETS 25 

tainly threw sinister light on the attitude of the 
two central European Powers. But these were 
considerably later revelations. In August, 1914, 
the shock came upon the world's great financial 
markets with as complete a violence and sudden- 
ness as it is possible, in an event of such im- 
mense importance, to imagine. This fact had 
very much to do with the character of financial 
events at the beginning of the war. Financial 
markets have had a long experience in preparing 
for the most formidable contingencies, provided 
they only have had reasonable notice. But it is 
probable that no other war in modem times— 
with the possible exception of the Franco-Prussian 
War of 1870, the circumstances of whose begin- 
ning were somewhat like those of 19 14 — has taken 
the great financial communities of the world so 
absolutely off their guard. 

Yet the very recent history of the markets 
gave a curious aspect to the complete surprise 
with which the outbreak of this war caught finan- 
cial Europe. The stock exchanges had at inter- 
vals been discussing, during at least four decades, 
a "general European war" as a possible factor in 
financial calculations. The discussion had for 
the most part been vague and academic; but in 
the two or three years before 19 14 the apprehen- 
sion had begun to take something like concrete 
form. This phase of the matter began in Jime, 



26 THE WAR PANIC 

191 1, when Germany, with the evident enough 
purpose of provoking trouble, sent a gunboat to 
Morocco, where France was engaged in protecting 
the concessions allowed to her by the Algeciras 
conference of the Powers; that action being ac- 
' companied by a menacing attitude at Berlin, 
and followed by Sir Edward Grey's declaration to 
the German ambassador, on July 21 of the same 
year, that, if the negotiations between Germany 
and France should fail, "Great Britain would be 
obliged to take some step to protect British in- 
terests." 

This was a veiled threat of war — by Germany 
on France, by England on Germany. Paris 
bankers had been lending money heavily in Ger- 
many; the estimates ran to the hundreds of 
millions of francs. They began that autumn to 
recall those loans, with severe money stringency 
in Germany as a result. Simultaneously, the com- 
mon people of France began to hoard gold in 
their old stockings and chimney-pieces; a historic 
evidence of their belief that war might be inevi- 
table. The "Morocco scare" passed over, but 
in the autumn of 191 2, when the Balkan War 
began, distinct signs of financial apprehension 
were renewed. European statisticians estimated 
that not less than $350,000,000 gold was hidden 
away by the people of Germany, France, and 
Austria, even before 19 14. 



PREMONITIONS 27 

During the whole of 19 13 money rates were 
abnormally high, both on the Continent and at 
London — ^largely as a result of this drawing 
away of gold from bank reserves. But it was 
evident, especially in London, that capital also 
was being hoarded. The large bankers and in- 
vestors showed immistakable preference to keep 
their accruing resources and savings on deposit or 
within easy reach, instead of investing them on 
the former scale in stocks or bonds of foreign com- 
munities, which could not be turned into cash so 
readily. It happened repeatedly, during 19 13, 
that new issues of foreign public securities of the 
highest grade, offered by Lombard Street bankers 
to investors at unusually low prices, were simply 
not taken at all by the public, but left on the 
bankers' hands. This phenomenon, which was 
ascribed at the time to the "world's scarcity of 
capital," is better understood to-day than it was 
then. The truth, as the next two years proved 
unmistakably, is that the world's free capital 
available for investment was as abundant as it 
had ever been before, but that its owners, in the 
prevalent atmosphere of vague political appre- 
hension, chose to keep it uninvested until the 
political horizon cleared. 

All this might seem to mean that financial 
Europe was looking for this war two or three 
years before it came. Yet it is equally easy to 



28 THE WAR PANIC 

show that, when the war actually broke out, every 
European market (possibly with the exception of 
Vienna and Berlin) was taken completely by sin-- 
prise as it is to prove that the people at large 
did not expect it. When war is expected rates 
for money always rise. But in January, 1914, 
money rates were reduced at the great state banks 
of England, Germany, France, Austria, Belgium, 
Denmark, Sweden, and Switzerland to the lowest 
figures touched since the Balkan War began in 
October, 191 2. The movement was most unusual 
for its emphatic unanimity. 

This was not all. An even more infallible sign 
of a financial market's belief in coming war is 
heavy selHng of outstanding government bonds 
and a rapid fall in their price. The reason is 
obvious; all experience teaches that the enor- 
mous borrowings of a government at war will 
flood the market with new public loans and beat 
down the price of older issues. Yet during those 
opening weeks of 19 14, prices for the government 
bonds of Germany, France, England, and Russia 
advanced 2 to 6 per cent, German and English 
markets leading in the movement, and the buying 
demand for all such securities being extremely 
active. This extraordinary incident on the mar- 
kets occurred only six months before Germany 
declared war. It is an equally striking fact that 
as late as the middle of July — two weeks before the 



AUSTRIA'S ACTION 29 

ultimatum to Russia and two weeks after the 
murder of the Austrian archduke — money rates 
were reported as growing still easier, both in Paris 
and London. The Austrian stock market, it is 
true, had fallen into a panicky condition; but 
even at Berlin the weekly report of a financial 
joiuTial, as late as July 9, made the interesting 
comment that "as usual, the Norway voyage of 
the Kaiser marks the beginning of the dead sea- 
son in German politics." 

When Austria, on Thursday, July 23, sent her 
note to Servia, making acceptance within forty- 
eight hours of every one of a series of insolent 
demands, an ultimatimi, prices on the Vienna 
stock exchange, already very low, declined with 
something like panicky violence. This of itself 
was not taken as of great significance; because, 
whatever might be the possibility of larger com- 
plications, Austria was evidently about to make 
war on Servia and was threatened with war by 
Russia, and every one at all familiar with the facts 
knew that the Austrian Empire was in no financial 
condition to endure the strain of war. When, 
therefore, on Monday, the 27th, the Vienna stock 
exchange closed its doors, followed by the govern- 
ment's declaration of war on Servia next day, the 
outside financial community was still suspending 
judgment. 

Its attitude was not long left in doubt. It is 



30 THE WAR PANIC 

the commonplace of financial philosophy that the 
stock market moves as much by instinct as by 
private information, and the closing of a stock 
exhange is an evidence of apprehension far more 
convincing than a fall in prices. It was not imtil 
Friday, July 31, that the German Government 
sent its ultimatum to Russia and France, followed 
by actual war next day. But on the 27th the 
Brussels stock exchange had formally suspended 
business; on the 28th the Paris Bourse shut down; 
on the 29th the exchanges at Saint Petersburg and 
Amsterdam closed their doors; and on the same 
day Berlin itself forbade all further dealings on 
credit, limj.ting stock-market operations wholly to 
cash transactions. During all this seven-day pe- 
riod, sales of securities by Berlin on every foreign 
market (notably New York) seemed to be limited 
only by the supply available to sell and the capac- 
ity of brokers to execute the orders. Private cables 
told of the published recommendation, by some 
of the largest German banks, for their clients to 
sell at once what they could of their investments. 
British consols fell from 75 to 6g}4, and all other 
international securities fell with them. On Au- 
gust 5, the German army having in the mean- 
time invaded Belgium, England declared a state 
of war with Germany. 

At London, the world's financial centre, finan- 
cial crisis did not wait for this action by the British 
Government. It was Germany's ultimatiims of 



ON THE STOCK EXCHANGES 31 

July 31 which made the war inevitable. The 
first financial result at London was the closing of 
the stock exchange on that day for an indefinite 
period. The obvious reason for this sudden 
action was that markets of every belligerent 
state on the Continent, realizing the urgent need 
for ready capital in the coming economic crisis, 
were selling in London what foreign securities 
they held — ^in quantities running high up in the 
millions of sterling, and at any price obtainable. 
Government bonds of the South American states, 
of Russia, Japan, and China, railway stocks of 
the United States and Canada, were being thrown 
on London's market by the Continent at declines 
running in many cases from 10 or 30 per cent 
within a very few days, the declines becoming 
more violent every day. On Lombard Street 
these securities are pledged in immense amounts 
as security against loans obtained from banks. 
Although probably less than usual was outstand- 
ing in these so-called "stock-exchange loans" 
when the war began, the subsequent report of a 
Lombard Street bankers' committee reckoned the 
total at $400,000,000. Much longer continuance 
of such a decline in prices would have reduced 
the borrowers to bankruptcy, because they could 
not keep the security up to the face value of their 
loans, and would have crippled the banks because 
they could not collect the loans. 

Back of this stood the further fact that London 



32 THE WAR PANIC 

could not allow Berlin, whose own stock exchange 
had already virtually suspended operations, to 
accumulate sinews of war by raising cash on the 
English market. These various possible results 
could be averted only by closing the stock exchange 
entirely; for only through the machinery of such 
an organized exchange could the huge mass of 
securities thus offered find a market. London's 
example was promptly followed by every other 
stock exchange in the world which had not al- 
ready closed. New York's shut down an hour 
after London's, though most reluctantly and in 
spite of the previous night's formal decision to the 
contrary. Nothing was more certain than that 
the closing at London, with New York still open 
for business, would converge on the American 
market the whole violence of the Continent's 
forced sale of securities with equally heavy selling 
by London itself. 

This closing of the stock exchange was in its 
way a dramatic testimony to the magnitude of 
the financial crisis; for at London no such action 
had ever before been taken — not even during the 
Napoleonic wars. The Paris Bourse had closed 
down for several months during the Prussian 
invasion of 1870 and the New York Stock Ex- 
change for ten days in the panic of 1873; but 
even with those markets it was a very temporary 
incident of bygone history, whose repetition no 



THE CRISIS AT LONDON 33 

one had predicted. This unprecedented action 
at London, however, was only the beginning for a 
series of events which equally marked new prece- 
dent. 

The two events which would probably have 
seemed to the financial world most inconceivable, 
only a week or two before, would have been a run 
on the Bank of England and a breakdown of 
public confidence in the English currency. It is 
true, the history of other countries had proved 
that when great wars break out, a run on the 
banks will usually be started by people who want 
to turn their bank-notes or government paper into 
gold, and hoard the gold. The teaching of experi- 
ence, as well as instinct, warns holders of paper 
money that its value may be heavily depreciated 
through increased issues of such paper for war ex- 
penses, whether by the government or the banks. 
The run on the Bank of France in 1870, leading to 
its suspension of gold payments on the currency, 
and the concerted refusal of the New York banks 
in December, 1861, to pay out gold to customers 
any longer, were noteworthy modem instances. 
In 1797, when the long war between England and 
France began, the Bank of England itself sus- 
pended specie payments; that is to say, it ceased 
to guarantee redemption of its notes in gold, and 
did not resume such full and free redemption 
during the twenty-four succeeding years. In 



34 THE WAR PANIC 

August, 1 9 14, almost the first financial act by 
official Germany was a similar suspension of gold 
payments. 

On Saturday, August i, a nm began on the 
Bank of England. The circumstances immediately 
surrounding that event were, however, so peculiar 
as to render it impossible even now to say whether 
the episode was or was not really in line with the 
usual phenomena of a bank run. During the 
summer season England sets apart the first Mon- 
day of every month as a business holiday. The 
news of Germany's ultimatimi to France and 
Russia arrived on the very Saturday when Lon- 
don people, preparing for their two-day midsum- 
mer outing, were going to their banks to draw the 
requisite pocket money. The English currency 
provided no unit of general circulation of a value 
between the silver half-crown piece worth slightly 
over 60 cents and the £5 Bank of England note 
worth $25, except the gold sovereign and half- 
sovereign. Therefore, without any necessary pur- 
pose of hoarding gold, the London people, planning 
for the holiday, brought their five-pound notes to 
their banks to be exchanged into gold. A few 
private banks, frightened at the war situation, 
refused to give out gold (it is usually such action 
of bankers themselves which starts a panic), and 
holders of the notes thereupon went to the Bank 
of England, which could not refuse. 



RUN ON THE BANK 35 

All such bank runs grow from the very fact 
that they have begun. How many of the appli- 
cants for gold were merely prospective holiday- 
makers nobody can know; one of the English 
writers on the episode, himself a "City man," 
has said that the crowd at the bank was "bruited 
abroad as a novel spectacle," and was watched 
"by a throng of amused spectators, mostly straw- 
hatted and in holiday attire, gathered on the 
steps of the Royal Exchange." But a run im- 
doubtedly existed, and we shall never know to 
what proportions it might have risen but for the 
fact that the bank was open only for two hours 
on that Saturday, and that a two-day holiday 
followed. Even as it was, withdrawal of gold 
from the Bank of England, both by individual 
holders of notes and by other banks, was so great 
that in its next weekly statement the institution 
had to report the enormous loss of $52,500,000, 
and a fall in its ratio of reserve to deposit liabili- 
ties to the startlingly low figure of 14^ per cent, 
whereas 40 per cent is the bank's traditional 
minimimi of safety. The ratio had been 40^^ 
per cent a week before, and 56 per cent at the 
same date a year before. No such showing of 
depleted gold reserve had been made by the bank 
since the panic of 1866. 

Nor was this the end of the "currency panic," 
even for the period of English holidays. The 



36 THE WAR PANIC 

warning word that English paper money might 
possibly be no longer exchangeable for gold spread 
instantly throughout the community. People 
with gold coin in their tills or pockets refused to 
give it up, and within twenty-four hours English- 
men found it impossible to make purchases with 
Bank of England notes, if the amount of the pur- 
chase compelled the seller to make change. As 
the sense of unreasoning panic spread, house- 
holders began to accumulate and hoard provisions 
as well as gold. 

On the Continent, for similar reasons, Eng- 
lish bank-notes were refused when tendered in 
payment, and, what was much more disturbing, 
continental banks refused to cash letters of credit 
or bankers' drafts made payable at London. 
During nearly a week after the panic had begun, 
gold was the only available medium of exchange. 
For a time, indeed, even gold coin of another 
country was refused. When business closed for 
the day at the Bank of England on August i, 
1914, it is perfectly safe to say that no one, how- 
ever experienced in the course of economic crises, 
knew what would be the financial case of Eng- 
land, or of Europe as a whole, when the next 
business day should begin. 



CHAPTER III 

EMERGENCY EXPEDIENTS 

THERE were two traditional measures of 
protection for the Bank of England in such 
emergencies as I have just described. Both 
had been utilized in preceding London panics. 
The bank may advance its official rate for loans; 
an action which in ordinary times, by forcing up 
also the rate bid for money by the general London 
market, will cause a transfer of capital to London 
from other markets whose rate had remained un- 
changed, and, along with such transfer of capital, 
will start import of gold. The governors of the 
bank may also, with the British Government's 
permission, suspend the Bank Act which requires 
the bank to issue no new notes, unless specifically 
secured by the same amount of gold on hand in 
the institution's vaults. The purpose of that 
action, as applied in the London panics of 1866 
and 1857, is to provide currency wherewith to 
maintain or increase reserves of cash at the pri- 
vate English banks, without waiting for the Bank 
of England to accumulate gold. 

As we shall see, neither expedient could ade- 
quately have met the situation of 19 14. Yet the 

37 



38 EMERGENCY EXPEDIENTS 

bank applied the first expedient at once. On 
July 30 its official discount rate was 3 per cent; 
it was raised to 4 that day, to 8 on the 31st, and 
to 10 on the ist of August. The 10 per cent rate 
was the highest ever fixed by the Bank of Eng- 
land; it had never been approximated since the 
great London money panic of 1866. At the same 
time the government authorized suspension of the 
Bank Act — a step taken since the act was passed 
in 1844 only on two occasions, in the panics of 
1857 and 1866. The bank did not make use of 
the government's authorization in August, 19 14, 
nor did it retain for more than a few days its 10 
per cent discount rate. That rate was reduced 
on August 6 to 6 per cent, and on August 8 to 5 
— at which it remained during practically the 
whole of the two succeeding years. 

It would probably not be imfair to say that 
both of these first incidents were in actual fact the 
result and symptom of panic on the part of bank 
and government themselves. It has, indeed, been 
quite invariably true of every sudden and grave 
financial crisis — notably of 1907 and 1893 and 
1873 in the United States and of 1890 and 1866 
at London — that unreasoning consternation got 
possession momentarily of the very people and 
institutions whose business it is to allay the panic 
of others. That this should have happened on 
August I, 1 91 4, when the financial crisis threaten- 



LOMBARD STREET'S PROBLEM 39 

ing London (all the circumstances considered) 
was undoubtedly the most formidable in the his- 
tory of the world, and when, moreover, outright 
collapse of credit at London would have sent 
Great Britain into the war financially crippled in 
advance, was certainly no matter for surprise. 
But during Sunday, August 2, and Monday, a 
legal holiday, England's statesmen and financial 
leaders had a very useful breathing space in which 
to decide how really to meet the coming crisis. 

The problem could not be solved on the lines 
of financial precedent, yet it had to be solved at 
once. It must be remembered that England had 
not yet declared war on Germany. The govern- 
ment and the great financiers undoubtedly knew, 
on August I, that Germany was invading Belgium 
and that England would have to go to war. But 
the people at large did not know it. As a matter 
of fact, formal declaration of war was not made 
until Wednesday, August 5. Then was the time, 
according to all experience, to look for the crisis 
of financial panic. The stock exchange, tradition- 
ally responsive to such influences in advance of 
the rest of the community, had already suspended 
business, thereby confessing publicly that it could 
not face the shock. What was to happen next, 
and how were the consequences to be averted ? 

There were three portentous possibilities which, 
in the absence of protective measures of imprece- 



40 EMERGENCY EXPEDIENTS 

dented character, were reasonable certainties. 
The first was another run on the private banks 
for cash and on the Bank of England for gold — a 
run vastly more dangerous in its probable scope 
and consequences than the run of Friday and 
Saturday. The second was a sudden call by 
creditors for instant payment in cash of all sums 
due them on notes or bills or contracts; such de- 
mand being made at the moment when the banks 
were shaking, when money could not be raised by 
sale of securities on the stock exchange, and when, 
therefore, the demand for payment would mean 
bankruptcy of the debtors. These two possibil- 
ities had been familiar in previous financial pan- 
ics, though perhaps never before in more alarming 
shape. 

But the third possibility was something with 
which no great financial market had ever been 
confronted since the modem credit system was 
established. To London — the banking centre of 
the world, the lender of capital to every other 
country, the market which provides credit facili- 
ties to all foreign markets to finance the world's 
international trade — the indebtedness of foreign 
markets when the war began was of stupendous 
magnitude. At first glance, this fact might seem 
to have been a strong point in the situation; and 
so it was rather generally considered by the com- 
munity at large, before the war began and for a 



ENGLAND'S FOREIGN LOANS 41 

very short time after its outbreak. But financial 
London soon learned better. It was one thing to 
have, on the books of London bankers, credits for 
hundreds of millions sterling in the shape of loans 
to foreign countries; it was a very different 
matter to collect them. If these foreign credits 
were in the form of stocks and bonds issued by 
borrowing companies or governments and held 
by London capitalists, the stock exchanges of the 
world were closed against the sale of them. If 
they were short-term loans granted to merchants 
by London for the piirpose of conducting the out- 
side world's immense international commerce — ^to 
pay the expense of production, manufacture, and 
transportation of the goods, with the two or three 
months' note of the ptu-chaser turned over as 
security for repayment when the goods should 
have been sold to the actual consumer — no such 
indebtedness would be repaid by countries with 
whom England should be at war, and it was prob- 
able that, in the world-wide collapse of credit, it 
could not be paid by England's allies or by neu- 
tral countries. 

Had the problem merely involved delay in 
collection by English bankers of what was owing 
to them — if nothing but their own capital had been 
at stake — the situation would have been awk- 
ward, perhaps embarrassing, but not necessarily 
critical. It would doubtless have necessitated 



42 EMERGENCY EXPEDIENTS 

postponement of other business plans with the 
further result, in some instances, of pecuniary- 
hardship. But the system of international bank- 
ing was such as to put a far darker color on the 
consequences of non-payment by such foreign 
borrowers. It was the proceeds of these short- 
term loans, as they matured from time to time, 
on which the London houses relied for payment 
of other short-term loans raised by themselves 
from banks or other banking-houses in Great 
Britain. The immense sums owed to Lombard 
Street bankers on current accoimt by Germany 
and Austria, for example, were offset by almost 
or quite as large obligations of those bankers to 
home institutions. The machinery of finance 
was so arranged that these home obligations 
would be met, when they matiired, through pay- 
ment of simultaneously maturing indebtedness by 
the foreign markets. 

But the instant that war was declared with 
Germany, payment of all such indebtedness to 
Lombard Street would end; yet the home obliga- 
tions set against it would fall due as usual, and 
the credit of other English firms and institutions 
was staked on the payment of them. What was 
to be the consequence? It was easy on August 
I, 19 14, to imagine coming announcement of in- 
solvency by the most powerful banking-houses in 
Great Britain. The condition of things which 



THE "SPECIAL HOLIDAYS" 43 

had arisen explains why the German financiers 
and statesmen, then and during the progress of 
the war, reiterated in a triumphant manner the 
seeming paradox that one of Germany's most 
powerful advantages over England lay in the fact 
that the German market's loans to the outside 
world were so much smaller than those of London. 
There was a good deal of fallacy in the argtiment; 
Germany's own international finance was in a 
tangle, and the later financial chapters of the war 
were destined to prove the real value of England's 
position in regard to the outside commercial 
world. But the embarrassment of financial Lon- 
don at the start was very critical. 

The protective measures taken by the banks 
and government in England were four in nimiber. 
All of them were imprecedented in the history of 
English finance. Each of them amounted to 
confession that the existing credit system had 
broken down. None of them would have been 
considered, two or three weeks before, as a con- 
ceivable occurrence in London's financial history. 

First, the government declared the two days 
following "bank hoUday," Monday, August 3, to 
be special legal holidays; which meant that de- 
positors could not draw money from the banks 
during that three-day period, and that payment 
of maturing notes and bills could not be required 
until Thursday. For London this was a startling 



44 EMERGENCY EXPEDIENTS 

innovation. Its only precedent was the similar 
declaration of "special holidays," during our panic 
of 1907, by the legislatures of California, Nevada, 
and Oklahoma — an action taken to avert the 
threatened bank runs of the period, and discussed 
in Europe, at the time, as illustrating the primitive 
methods and impulsive action of our Western 
communities. But the London "special holidays" 
of August, 1 9 14, were designed not only to prevent 
a run on the banks, or to give the financial com- 
munity as a whole a chance to recover its wits. 
The three-day respite was instantly utilized for 
the second protective measure; preparation of an 
"emergency currency" to be issued under govern- 
ment auspices. 

This was something which had never been 
done before in English history. But a moment's 
reflection had convinced both statesmen and 
financiers that neither a 10 per cent Bank of Eng- 
land rate, nor permission for the bank to issue 
notes not "covered" with gold in the institution's 
vaults, would meet the situation. No bid for 
money could be high enough to draw gold from 
foreign markets whose own banks had already 
suspended gold payments. No additional issue 
of £5 notes, the lowest denomination permitted 
to the Bank of England, would prevent the draw- 
ing out of gold. We have seen how the people 
of England, during the three-day holiday, were 



WAR CURRENCY IN ENGLAND 45 

unable to make small payments with Bank of 
England notes. The "change" for such pay- 
ments would have been gold, and gold was al- 
ready being hoarded. 

What the treasury did, then, as the second of 
the protective expedients, was to issue, in de- 
nominations of 10 and 20 shillings, legal- tender 
paper currency. These so-called ' ' currency notes ' ' 
were issued through the Bank of England to other 
banks, which pledged against the notes an equiv- 
alent amount of commercial paper, British Gov- 
ernment securities, or credits with the Bank of 
England. At the end of August, $125,500,000 of 
this new cturency was in circulation; at the end 
of 1914, $192,300,000; at the end of 1915, $515,- 
600,000; and it increased more than $134,000,000 
in the next eight months. 

As for the economic character and economic 
results of this remarkable experiment, for the 
present it need only be said that the hurried is- 
sue of this currency in the "war panic" ended the 
run on the banks, that it provided the requisite 
small money for the people, and that it apparently 
stopped the hoarding of gold. It is highly in- 
teresting to observe that these emergency paper 
issues, although an absolute innovation in English 
financial history, closely resembled in some re- 
spects our own old national bank currency se- 
cured by United States Government bonds, in 



46 EMERGENCY EXPEDIENTS 

others the so-called "Aldrich-Vreeland emer- 
gency currency," authorized by our law of 1908 
and based on securities and commercial assets. 
It was an irony of circumstance that English 
financial opinion had heartily disapproved of 
both of these American systems; each of which 
has in fact been now superseded by the new 
Federal Reserve system. 

The menace of a general "bank run" being 
thus averted, there arose the problem of dealing 
with a sudden and general demand of creditors 
for payment of money owing to them. When the 
Balkan War of 191 2 broke out, the business com- 
munities of western Europe were interested and 
considerably annoyed by receiving, from the 
chambers of commerce in Bulgaria and Servia, 
formal announcement that, since all the business 
men were at the front and since their earning 
capacity was therefore interrupted, a "mora- 
torium" on debts had therefore been proclaimed. 
The debts, whether owed to home or foreign 
creditors, were not repudiated; but, no matter 
when their payment properly fell due, they would 
not be paid until after the war. The great finan- 
cial markets of the world looked upon that an- 
nouncement much as it did on the news of the 
"special holidays" in our Western States in No- 
vember, 1907. But in the one case as in the 
other, London had to follow in 19 14 the example 



THE "MORATORIUM" 47 

of these other humble financial markets. This 
was the third expedient to meet the crisis. 

On Thursday, August 6, a royal proclamation 
declared that all payments due on August 4, or 
falling due on September 4 under a contract 
drawn before August 4, "shall be deemed to be 
due and payable on a day one calendar month 
after the day on which the payment originally 
became due. ' ' This * ' moratorium ' ' (the word now 
became familiar in European high finance) was ex- 
pressly stated not to apply to wages and salaries, 
or to indebtedness below £5, or to rates and taxes, 
or to interest and dividends on securities, or to 
government payments, or to bank-notes, or to 
ocean freights, or to indebtedness due by indi- 
viduals, firms, or institutions doing business out- 
side the British Islands. With some alterations 
and amendments, the original proclamation was 
twice extended, carrying the date of the mora- 
torium forward to November 4, 1914. By that 
time — and, indeed, in the case of most institu- 
tions by September — panic conditions had so far 
disappeared that business houses with maturing 
obligations relinquished the privileges of the 
proclamation voluntarily. Meantime, however, 
although the threatened chapter of bankruptcy 
was averted, the machinery of financial London, 
as of financial Europe generally and of financial 
America, came almost to a halt. When pay- 



48 EMERGENCY EXPEDIENTS 

ment of indebtedness due to a business house is 
arbitrarily postponed by law, the creditor might 
protect himself by demanding similar postpone- 
ment of what he owed to some one else. But such 
a condition of things would certainly not encour- 
age him to embark on other business under- 
takings. 

His eye would be fixed almost exclusively on 
the problem of disentangling himself from his 
embarrassing and humiliating position. It was 
instantly perceived that long continuance of that 
situation would very possibly cause paralysis to 
England's home trade and foreign commerce. 
Nor, indeed, was this the only danger. The mora- 
torium, applying as it did to "all payments due 
on August 4," covered indebtedness of English 
firms to foreign creditors. It was a matter of far 
more serious concern to London's prestige as the 
money centre of the world that financial England 
should suspend payments to the foreign markets, 
than that payments of Englishmen to English- 
men should be deferred. We shall presently meet, 
in our narrative, some very tangible and very 
grave results of this international moratorium. 
As it stood it distinctly menaced London's eco- 
nomic position, and the next and fourth expedient 
adopted was directed to avert that imminent 
calamity. The problem was how to untie the 
hands of bankers and banking-houses who, un- 



ENTANGLEMENTS OF BANKERS 49 

able to collect and use the huge sums owed to 
them in connection with their foreign business, 
could not stir. The moratorium had averted the 
immediate consequences, because the bankers 
were relieved from paying the equally great sums 
which they themselves owed at home. But this 
only shifted the burden to the shoulders of other 
houses; and moreover the moratorium, as we 
have seen, ran only for a month at first, and even 
its prolongations were known to be purely tem- 
porary. It could not be extended throughout the 
war; yet its final termination would leave these 
banking-houses with their home liabilities as press- 
ing as on August i, with the stock exchange still 
closed against sale of their securities and with their 
foreign assets equally beyond their reach. The 
result inevitably was that the great lending firms 
and institutions dared not increase their loans. 
They had their own position to fortify, and the 
market in which the drafts were discounted for 
the conducting of England's foreign trade began 
to shrink alarmingly. 

It was then, on August 13, that a very bold 
and remarkable step was taken. The government 
announced that the Bank of England was pre- 
pared to take over from these international 
bankers all the "approved bills of exchange" for 
which they were liable on transactions prior to 
August 4. The bank would provide the funds 



so EMERGENCY EXPEDIENTS 

requisite to pay off these bills at maturity. The 
bankers would still remain ultimately responsible 
for payment, and that liability may cut a figure 
in London's financial history after the war. 
Furthermore, to stimulate earlier repayment by 
the. bankers, the rate of interest charged by the 
Bank of England for its services was to be 2 per 
cent above the official bank rate; and, although 
that official rate had been reduced from 10 per 
cent to 5, even that change left the rate for "re- 
discount" very heavy. But the Bank of England 
agreed not to claim repayment from the bankers 
for a period of one year after the close of the war, 
and the government of Great Britain "agreed to 
guarantee the Bank of England from any loss it 
may incur" in discounting such bills of exchange, 
"either home or foreign, bank or trade, accepted 
prior to August 4, 19 14." The chancellor of the 
exchequer subsequently stated to Parliament 
that between $1,500,000,000 and $2,500,000,000 
of such bills were believed to have been outstand- 
ing when the war began, and that of this total 
$600,000,000 had been taken over by the Bank of 
England. As was to be expected, this arrange- 
ment had some extraordinary results in the oper- 
ations of the Bank of England. Wholly apart 
from advances made by the bank to the govern- 
ment, its loan account rose from $236,500,000 on 
July 30 to $609,100,000 as early as September 3. 



THE OUTSIDE WORLD 51 

On July 29, 1 91 5, it reached its maximum of 
$960,900,000. From that time forward, chiefly 
because the "moratorium bills" were being so 
rapidly paid off from the accruing resources of the 
banking-houses, the Bank of England's huge loan 
account was gradually and progressively reduced. 
By the first week of June, 191 6, it was down to 
the lowest total since the war began. 

I have reviewed in this chapter the expedients 
by which financial London and the British Gov- 
ernment met the crisis. Adopted as they were in 
the central money market of the world, where 
each and all of them were previously unheard-of 
innovations, and where each was a measure in- 
conceivable to the financial mind a very few 
months before, this story of England's action in 
the war crisis sufficiently indicates the experience 
of the whole financial world. To set forth in 
equal detail the similar decrees and policies of the 
other belligerents and of the neutral countries 
would extend this narrative too far. No state 
other than England adopted the extraordinarily 
sweeping plan for assumption of bankers' non- 
collectible debts by the central banking institu- 
tion. But almost every belligerent, and with 
them so financially powerful a neutral state as 
Holland, resorted in some way or another, tem- 
porarily or permanently, to an "emergency cur- 
rency." Germany did not officially declare a 



52 EMERGENCY EXPEDIENTS 

moratorium on debts, though the government 
intervened to render the action of the courts 
sufficiently lenient to achieve the same ends. 
France extended its moratorium even to rents, 
with inevitable after-complications. 

Practically all of the moratoriums expired of- 
ficially, early in 191 5. But nothing could better 
illustrate the world-wide scope of the financial 
shock which came with the outbreak of the war, 
than the array of countries and markets which 
resorted to this postponement of payments 
through governmental decree. It was not only 
the European belligerents which had recourse to 
it. A formal moratorium was proclaimed at once 
in Denmark, in Italy, in Norway, in Egypt, in 
Greece, in Portugal, in Rimiania, in Sweden 
(where it continued with certain limitations up 
to the autumn of 191 5). Holland decreed special 
measures for extension of time to debtors. That 
Argentina, New Zealand, Paraguay, Nicaragua, 
Peru, and South Africa should have suspended 
such settlements from July, i9i4» i^P to a date 
frequently fixed well into 191 5, was a demonstra- 
tion, partly, no doubt, of the enormous shock 
precipitated by the London panic, but chiefly of 
the extent to which the European War itself had 
deranged the entire economic system of the world. 



CHAPTER IV 

FINANCING THE WAR 

EMERGING from the financial, commercial, 
and industrial panic of August, 19 14, bel- 
ligerent Europe was confronted with the 
problem of meeting the war expenditure. Into 
the complete and very intricate details of the 
fiscal operations involved in this stupendous task 
I shall not undertake to go. But the immediate 
and the later achievements are of special eco- 
nomic interest from their conclusive demonstra- 
tion of the extent to which the world's resources 
of available capital were underrated when this war 
began, as indeed they have been on every similar 
occasion in modem history. The nature of the 
task which at once confronted public exchequers 
in the fighting states may be judged from the fact 
that, whereas the British Government's average 
daily expenditure for all purposes, in the official 
twelvemonth ending March 31, 19 14, was $2,750,- 
000, daily expenditure for war alone reached 
$10,000,000 even in August, 19 14, and averaged 
$25,000,000 before the second year of war was 
ended. A year after the outbreak of the war 
the German finance minister, when announcing 

S3 



54 FINANCING THE WAR 

in the Reichstag the third imperial war loan, 
stated that the daily cost of war to all the fighting 
Powers had risen to $75,000,000; the monthly- 
cost to more than $2,000,000,000; the yearly cost 
to something like $25,000,000,000. The speech 
containing those estimates was made, moreover, 
before Bulgaria had entered the war and before 
the Balkan campaign of 191 5 had begtm. 

Germany alone, this ministerial speech pro- 
ceeded, was now spending in a single month more 
by one-third than the total cost of her Franco- 
Prussian War. At the daily rate of war expendi- 
ture then prevailing, it was possible to say that 
England would have paid out, within six months, 
more than the United States Government spent 
for military and naval purposes in all the four 
years of the American Civil War. It is commonly 
estimated that the war with France in the Na- 
poleonic period, from 1793 to 181 5 inclusive, cost 
England in the aggregate $4,150,000,000. But 
the chancellor of the exchequer declared to Par- 
liament at the end of 191 5 that England's ex- 
penditure, during only the twelvemonth period 
ending with the ensuing March, would amount to 
$7,950,000,000; and the average daily rate of 
outlay was progressively increasing. 

These figures of the actual waste of capital in 
war were so large that to most minds they were 
merely bewildering. Some of the most experi- 



THE FIRST VOTES OF CREDIT 55 

enced international bankers ventured the posi- 
tive prediction, at the beginning of this year, 
that the belHgerent governments would not be 
able to continue raising the necessary funds after 
191 5. This prediction, like so many others made 
in the earlier months of war, received a sufficient 
answer from the progress of events. But the 
problem was of the highest economic as well as 
political influence, exactly how the various bellig- 
erent governments managed to raise these wholly 
imprecedented sums of money. In 1907, explain- 
ing the strain on credit and resources which had 
caused the world-wide economic crisis of that year, 
an eminent French statistician had estimated that 
the whole civilized world could provide annually 
for investment in new securities only $2,400,000,- 
000, or less than one-tenth of what the belligerent 
states, according to the German minister's esti- 
mate, were actually spending on war alone in 

1915- 

A few days after war had begun, the British 
Parliament voted to the government a prelimi- 
nary war credit of $500,000,000; the German 
Reichstag authorized an expenditure of $1,250,- 
000,000; the other belligerents granted similar 
powers to their governments. These votes were 
merely a formality ; they left to the several finance 
ministers the practical task of obtaining the 
stupendous sums. By the middle of 1916, the 



S6 FINANCING THE WAR 

Parliamentary votes of credit had amounted to 
$14,000,000,000, and the German, French, and 
Russian appropriations kept step with them. 
The resources of the great slate banks were neces- 
sarily drawn upon at the start in the shape of 
huge advances of credit to the government. Eng- 
land began by placing with London bankers, ev- 
ery week or fortnight, the temporary obligations 
known in Lombard Street as "treasury bills." 
They had only six months to run, were issued in 
lots of $90,000,000, and carried very low rates of 
interest; but recourse to long-term funded loans 
soon became unavoidable. Until 19 14, the largest 
single loan ever issued by the British Government 
was the $300,000,000 Boer War loan of 190 1. In 
November of that year Great Britain offered to 
subscribers, payable in fixed instalments during 
the next five months, a thirteen-year funded loan 
of $1,750,000,000, sold at 95 and bearing 3^^ per 
cent interest, as against the 2^ per cent rate on 
the outstanding British Government bonds — 
which, however, were then quoted on the market 
below 69, The next loan, that of Jiily, 191 5, was 
for $2,900,000,000 in 4)4 per cents. 

Germany came earlier into the market for long- 
term bonds, offering to investors a ten-year 5 per 
cent loan at 971^, for which $824,000,000 was 
subscribed; she borrowed $2,100,000,000 more the 
next February, and $2,800,000,000 in the following 



THE NEW FISCAL BURDEN 57 

September, France relied longer on the national 
bank, which advanced $580,000,000 to the govern- 
ment for initial war expenses and $1,200,000,000 
in all during the first six months of war, issuing 
note circulation against the government obliga- 
tions deposited in its vaults, with results of which 
I shall have something to say later on. But the 
French treasury also sold to the public, at varying 
fates, the 5 per cent "national defense bonds" 
with short maturities, which reached $1,500,000,- 
000 before 1916, having by that time been supple- 
mented by a $2,762,000,000 sixteen-year 5 per 
cent loan, placed with investors late in 191 5, at 
the low rate of 88. 

In addition to the outlay by the belligerent 
states for their own war expenses, the powerful 
belligerents made advances of money to their 
financially weaker allies in sums which would alone 
have served to finance the whole of a great war a 
generation ago. The British finance minister 
has shown that England, during the two first 
years of war, had loaned upward of $3,000,- 
000,000 to its allies and colonies. France, in the 
face of her own economic troubles, has au- 
thorized advances of nearly $800,000,000 to such 
allies as Belgium and Servia. At the beginning 
of 1 916 it was possible to state that the national 
debt of England, as compared with its debt when 
war began, had risen from $3,500,000,000 to 



58 FINANCING THE WAR 

$11,155,000,000; of Germany, from $5,200,000,- 
000 to $11,613,000,000; of France, from $6,600,- 
000,000 to $13,197,000,000; and of Russia, from 
$4,500,000,000 to $8,655,000,000. This indebted- 
ness had considerably more than doubled in a year 
and a half, the increase being the prodigious sum 
of $24,820,000,000 for only four of the twelve 
belligerents. 

How was it possible for the people or the banks 
to provide such unheard-of sums? The first 
answer is the answer which the financial history 
of all great wars has given — that the actual re- 
sources of available capital, in a prosperous 
modem state, are always underestimated. An in- 
teresting calculation, by an international banker, 
is that the whole debt of England at the begin- 
ning of 19 16 was only equal to one year's total 
income of the English people, and that whereas 
the increase in the debt, as compared with that at 
the end of the Napoleonic wars, was 145 per cent, 
the estimated annual income of the people had 
increased more than 800 per cent. Such estimates 
are not easily susceptible of absolute proof; but 
they show at least what factors are really operat- 
ing in the problem. Capital, after all, is the 
whole world's accumulated wealth and property; 
the real problem of borrowing governments is 
how to get in touch with it. 

Almost the first step taken, by all the Powers 



RESTRICTIONS ON MARKETS 59 

confronted with these enormous requisitions for 
the war, was to stop the subscribing of home in- 
vestment capital to other new securities. The 
English market had in a single twelvemonth, 
during the decade preceding 19 14, invested as 
much as $1,337,000,000 in all sorts of new se- 
curities, home and foreign, and that was its 
highest record. In the whole of 19 15 its total 
subscriptions to new securities footed up $3,426,- 
000,000, but only $76,000,000 of that enormous 
sum was placed in ordinary investment enter- 
prises. The $3,350,000,000 balance was entirely 
made up of British war loans, or of loans for war 
purposes, made to England's allies and colonies. 
At Berlin and Paris the story was the same. 

This concentration almost exclusively on home 
war loans, of the accruing capital heretofore an- 
nually invested in other securities, provided part 
of the capital needed for the war loans, but by 
no means all. The war loans actually placed at 
home by England in the first twelve months of 
war finance, amounting to $4,750,000,000, were 
at least twice as large as the largest sum ever 
previously invested by the English market, dur- 
ing a corresponding period, in all new securities 
combined. Germany's $6,100,000,000 war loans 
were probably five or six times as large as her 
best previous record in absorbing new securities. 
From what source, then, were the remaining cash 



6o FINANCING THE WAR 

subscriptions drawn ? Some of them represented 
proceeds of foreign investments (such as Amer- 
ican securities) sold back to the coimtries of their 
origin. A very large contribution came from de- 
posit-banks, savings-banks, and all kinds of 
fiduciary institutions, which used their resources 
to the utmost limit in taking the new war bonds 
into their assets. 

Much of the money must have come from use 
for loan subscriptions, by merchants and manu- 
facturers, of business profits which they would 
usually reinvest in their own enterprises. Part 
came undoubtedly from drawing down closely 
the idle balances of bank depositors ; part (and in 
Germany a very substantial part) through huge 
subscriptions virtually forced by government 
from lucrative war-munition enterprises like the 
Krupps. "No new enterprises are planned," a 
Vienna financial correspondent wrote in 19 15, 
discussing the successful war loans of Germany 
and Austria. "No journeys are undertaken. 
Nobody builds himself a house or lays out a park." 

All of the money once devoted to such pur- 
poses went, under the new conditions, to the war- 
loan subscriptions. Only a little reflection will 
be needed to convince the average man of the 
prodigious available fund which all these sources 
combined, if simultaneously drawn upon in a rich 
and thrifty country and under patriotic impulses, 



SOURCE OF THE WAR FUNDS 6i 

would provide for the public loans. "Every 
citizen," one of the highest officers of the British 
treasury declared to the House of Commons, in a 
debate on the finances a month ago, "ought to be 
prepared to put at least one-half of his current 
income at the disposal of the state." 

He might do this through subscribing to a 
loan, or through paying higher taxes ; as to which 
last-named recourse I shall presently have a 
word to say. But no one, at all familiar with a 
thrifty community's rate of private income and 
expenditure, should need much argument to con- 
vince him of how enormous a war fund would be 
provided by such a process. It was after an 
American secretary of the treasury, in 1863, had 
found that sufficient war loans ' ' could not be dis- 
posed of to capitalists without serious loss," that 
Jay Cooke and his army of canvassers, peddling 
the 6 per cents on commission, like book agents, 
from village to village, placed nearly $400,000,- 
000 with the people at large. Instances such as 
this are perhaps the simplest answer to the famil- 
iar prophecy of the "economic ruin of Europe." 

A Europe with greatly depleted capital and 
greatly diminished financial power, after the war 
is over, is a natural supposition. But that bel- 
ligerent Europe is to be "economically ruined," 
in the sense that it will forever lose its old-time 
power in production, consumption, home and 



62 FINANCING THE WAR 

foreign trade, and accumulation of wealth, is 
an absurd supposition. The world is dealing, 
in this episode, with an aggregate reserve of 
capital which is at least as much greater than 
that of the Napoleonic period, for instance, as 
the burden of war expenditure and war indebted- 
ness is greater than what it was in the decade end- 
ing with 1815. Economic progress throughout 
Europe will unquestionably be arrested, prob- 
ably for many years; with what accompanying 
phenomena, it is not easy to foreshadow; and any 
forecast of economic conditions in any or all of 
the belligerent states, when the war is over and 
the long process of financial readjustment begins, 
must depend in large measure on the duration of 
the war itself. If the theory were correct which 
was at first so widely held, that Europe in general 
or Germany in particular would break down eco- 
nomically under the strain of military expendi- 
ture, it would have been possible to imagine one 
or more of the belligerent countries reduced to a 
state of collapse, even before the progress of the 
military campaign had brought the conflict to 
any decisive conclusion. 

Economic exhaustion, however, is a formula 
considerably more difficult to reduce to terms of 
concrete phenomena even than the other familiar 
theory of "government bankruptcy." One would 
expect to define the nature of such a process by 



"ECONOMIC EXHAUSTION" 63 

reference to the precedent of other wars. But 
miHtary history throws Httle or no Hght on the 
question. If the other great wars of modern 
times prove anything in this regard, it would 
seem to be that behigerent states are not beaten 
purely by economic exhaustion. It is apparently 
the teaching of such history that governments 
can fight on, often against seemingly overwhelm- 
ing military odds, long after the puzzle has become 
inscrutable, where they could raise the money to 
carry on the war, how they could maintain their 
home and foreign credit, and by what means they 
could continue to feed both their non-combatant 
population and their armies. It has been unfail- 
ingly characteristic of all great wars, especially 
when they were prolonged beyond previous ex- 
pectation, that even financial experts have pre- 
dicted financial exhaustion, probably during the 
war, but in any case after it, as an inevitable con- 
sequence. 

Macaulay has a passage much in point, on the 
public debt of England. At the end of the war 
with Louis XIV, that debt, he said, was con- 
sidered, even by competent thinkers, "as an en- 
cumbrance that would permanently cripple the 
body politic." Nevertheless, "trade flourished, 
wealth increased, the nation became richer and 
richer." The prediction was repeated, with the 
same result, during England's other wars of the 



64 FINANCING THE WAR 

eighteenth century. Hume argued, after the wars 
of the elder Pitt, that "all the revenues north of 
the Trent and west of Reading were mortgaged"; 
Adam Smith warned England against repeating 
the hazardous experiment. Yet the public debt, 
which was then £140,000,000, rose to £240,000,- 
000 at the end of the American War, and to £800,- 
000,000 at the end of the conflict with Napoleon. 
Had an enlightened man of 1792 been told, 
Macaulay continues, that "in 181 5 the interest 
on £800,000,000 would be duly paid to the day 
at the bank, he would have been as hard of be- 
lief as if he had been told that the government 
would be in possession of the lamp of Aladdin or 
the purse of Fortunatus." But the subsequent 
economic history of England we all know. 

Macaulay was writing primarily concerning 
after effects. But predictions have also been made 
early in such conflicts, and seemingly on the basis 
of sound reasoning, to the effect that financial ex- 
penditure on the scale required could not possibly 
last beyond a stated period. This was freely pre- 
dicted regarding Japan in 1904, and not alone by 
pro-Russian financial prophets. The country was 
too poor to keep up such war expenditure ; it had 
no adequate reserve of accumulated capital at 
home; the time must come when its government 
would no longer be able to raise funds abroad. 
The Manchurian war was cut short after a year 
and a half of fighting, through America's medi- 



OLDER PRECEDENT 65 

ation, and therefore It may doubtless still be ar- 
gued on general principles that another year or 
two would have given Japan her financial coup de 
grace. But the evidence which we do possess is 
embodied in the facts that Japan kept on raising 
public war loans at home, chiefly through popular 
subscription, and that her series of foreign loans 
were placed at London and at New York on 
progressively more favorable terms, after the 
first six months of warfare. 

What even the London banking community, in 
the disastrous days of 1797, predicted regarding 
England's power to finance a continued war, did 
not greatly differ from what the New York bank- 
ing community predicted regarding the United 
States in 1861, when the government at Wash- 
ington found difficulty in placing a loan for a 
few millions with Wall Street bankers at 7 per 
cent. Yet England fought for the seventeen sub- 
sequent years, and raised something like $2,000,- 
000,000 on its loans to pay the cost of it, while 
the United States raised and spent $3,000,000,000 
purely for military and naval operations during 
the four years after Bull Run. The unsuspected 
sources of taxation discovered in these historic 
instances, and the unimagined reserves of private 
capital, reached by ingenious appeals from the 
government, might properly make the financial 
prophet cautious during the present war. 

The same considerations, and others with them, 



66 FINANCING THE WAR 

have bearing on another popular theory as to 
this huge economic burden. This takes the form 
of prediction that belHgerent Europe will "re- 
pudiate" its war debt — a word understood in vari- 
ous ways by the various people who use it. But 
nothing is more improbable than refusal of any 
great European government after the war to pay 
interest on that debt or the principal at maturity. 
The reason is that the present belligerents must 
borrow heavily, even after the war, to meet the 
continuing public deficit, and that a policy of 
bad faith in relation to the war loans would at once 
destroy the public credit. The erratic President 
Andrew Johnson, in his annual message of 1868 
to Congress, described it as "just and equitable 
that the 6 per cent interest now paid by the gov- 
ernment should be applied to reduction of the 
principal," because "holders of our securities have 
already received upon their bonds a larger amount 
than their original investment, measured by a 
gold standard." The overwhelming indigna- 
tion with which Congress instantly voted down 
this fantastic proposal showed that they not 
only clearly recognized the moral character of 
such action, but foresaw its financial conse- 
quences. 

Our legislators of that day voted down also 
the more insidious proposal to pay interest and 
principal on the war debt, not in gold, but in de- 



GERMAN GOVERNMENT'S POLICY (y-j 

predated paper money. It is a striking fact, 
illustrative of the conditions possibly foreshad- 
owed for financial Europe after peace, that on 
the continental money markets discussion has 
been heard of the plan to pay in paper money the 
interest on war loans, so far as the bonds are held 
by the people of those countries. But nobody 
has suggested payment of anything but gold for 
interest due to foreign creditors. Europe is well 
aware how far it must rely, after the war, on good 
financial relations with such powerful neutral 
communities as the United States. 

Some interesting light has been thrown on this 
aspect of the question by another series of inci- 
dents in the financing of the war. I have thus 
far spoken only of the recourse to public loans to 
meet the war expenditure. Six months after the 
beginning of the war, Doctor Karl Helflerich, im- 
perial finance minister, formally annotmced to 
the German Reichstag that the Empire would 
make no attempt to meet the cost of war through 
new taxes. *'We do not," he declared, "desire to 
increase by taxation the heavy burden which war 
casts on our people." This was enunciating a 
principle practically new in the history of pro- 
tracted modem wars. It amounted to asserting 
that the economic interest of a belligerent state 
would be served by meeting the whole war expen- 
diture through public loans, thereby shifting the 



68 FINANCING THE WAR 

entire fiscal burden upon the shoulders of future 
generations. 

Doctor HelfTerich, being an experienced banker 
and economist, was undoubtedly aware of the 
dangerous doctrine to which he was committing 
the German Government. Therefore, in a subse- 
quent speech to the Reichstag during August, 
1 91 5, he explained that "we owe it to the future 
of our people" that "the future development of 
their lives shall be freed from the appalling bur- 
den caused by the war." How was this appar- 
ently inconsistent end to be achieved ? Through 
the fact, so announced the finance minister, that 
"those who provoked the war, and not we, de- 
serve to drag through the centuries to come the 
leaden weight of these thousands of millions." 
In this remark were embodied two strong pre- 
possessions of the German mind in the earlier 
months of war — first, that England, France, and 
Russia "provoked" the war which Austria made 
imminent by her insolent demands on Servia, 
the averting of which was blocked by refusal 
of official Berlin to join in England's proposals 
for mediation, and which Germany precipitated 
by her high-handed ultimatums and her unlaw- 
ful invasion of Belgium; second, that Germany, 
having won the fight, would impose on her antag- 
onists a cash indemnity running upward of $10,- 
000,000,000. 



THE NEW ENGLISH TAXES 69 

Evidently conscious of the absurdity underly- 
ing these calm assumptions — especially with the 
enemy in possession of Germany's colonies, with 
England controlling the sea, and with the whole 
civilized world outside of Germany in agreement 
that reparation to Belgium was the sine qua non 
of the final reckoning — the minister added, in a 
rather obvious anticlimax, that "the dreadful 
financial exhaustion of our opponents may seem to 
make this difficult of attainment." But at all 
events, so far as concerned the plan of paying for 
war exclusively by borrowing, "the force of cir- 
cumstances has made England do the same." A 
slight increase in the English income tax and 
excise duties during 19 14 "covered only 5 per 
cent of the English war bill." A subsequent at- 
tempt to increase the British income tax had 
"roused such lively opposition that its success is 
more than dubious." Therefore, with Germany, 
as with the other belligerent Powers, "the only 
method seems to be to leave the settlement of 
the war bill to the conclusion of peace and to the 
period after peace has been concluded." 

But the German Government was presently to 
learn that it had misjudged the temper of Eng- 
land actually at war and confronted with rising 
taxes, as completely as it had misjudged the 
temper of England on the verge of war and con- 
fronted with Irish insurrection. When the first 



70 FINANCING THE WAR 

"war budget" of 19 14 had, as the German 
finance minister asserted, introduced only sHght 
changes in the tax bill, the British taxpayers them- 
selves insisted that their own immediate burden 
be increased. In September, 191 5, the new 
chancellor of the exchequer annoimced a very 
extraordinary series of new imposts. The income 
tax, already exceptionally high before the war 
began (owing to the government's extensive plans 
for social and industrial betterment), was raised 
nearly one-half beyond its previous figure. The 
tax on moderate incomes from investments rose to 
i7>^ per cent of the income — a wholly unprece- 
dented height, and nearly three times what it 
had been before the war — ^with a graduated 
"super-tax" on large incomes which raised the 
total exaction from incomes of $500,000 or over 
to no less than 34 per cent. Excise or import 
taxes ranging from 30 to 100 per cent were im- 
posed on a number of articles in constant use. 
Rates for postage, telephone, and telegraph mes- 
sages were heavily increased. Out of all profits 
from manufacture of war material, the govern- 
ment was to take one-half in taxes. Roughly 
speaking, the total annual revenue from taxation, 
which was $800,000,000 in the twelvemonth be- 
fore the war began, was estimated now at very 
nearly $1,500,000,000. The absolutely new requi- 
sitions for the coming year footed up $510,700,000. 



A HUGE WAR REVENUE 71 

No such increase in a single season had ever been 
witnessed in the history of taxation. 

Even so, only 24 per cent of the annual British 
war expenditure was being paid from taxes, 
whereas the common estimate of history had been 
that 40 per cent of England's costs in the Na- 
poleonic War had been thus met. Early in 1916, 
however, another and even more startling budget 
of new taxation was presented to Parliament by 
the exchequer. The income tax went higher 
still; incomes of $10,000 a year, for instance, 
paying 25 per cent to the government. Other 
taxation then imposed brought the sum total of 
annual revenue of all descriptions up to $2,500,- 
000,000, as against $1,130,000,000 in the twelve- 
month ending with March, 1915, and $990,000,000 
for the similar period ending with March, 1914. 
The percentage of increase was not so great as the 
rise in the United States Government's revenue 
from $41,400,000 in 1861 to $322,000,000 in 1865; 
but our Federal taxation when the Civil War began 
was negligible, whereas England's national tax rev- 
enue in the year before the war was the largest 
of any nation in the world. It was now possible 
for the British ministry to say that something like 
27 per cent of the annual war expenditure was be- 
ing paid from taxes, and that new revenue from 
that source was already providing in fiill for in- 
terest on the debt and a future sinking fund, 



72 FINANCING THE WAR 

whereas Germany was paying interest on its 
later war loans with the proceeds of the earlier 
ones. 

It should be remarked that this notable achieve- 
ment was the achievement of England only. 
France made little or no attempt to meet the cost 
of war from taxes. Russia had decreased rather 
than increased public revenue through her em- 
bargo on the state-controlled sale of spirits. But 
the English budget and the remarkable una- 
nimity of approval with which the taxpayers 
received it threw at least considerable light on 
the theory of "financial exhaustion." Even as 
regards the policy of Germany (which responded 
to England's new announcements by a not very 
significant new taxation yielding $120,000,000 
per annum), it is fair to keep in mind that in 
1 9 13, when increasing her standing army, pre- 
sumably in preparation for the war of 19 14, the 
Empire had imposed what is usually the last word 
in taxation — a heavy percentage tax on property 
of every sort, to be paid in three instalments as 
a "contribution to imperial defense." 

In view of what England actually did, it may 
safely be assumed that the power to raise money 
for the war by other means than loans had by no 
means approached exhaustion. Indeed, a very 
striking fact of the European situation was that 
the very familiar recourse of former wars — the 



UNTRIED EXPEDIENTS Ti 

issue of paper money directly by the government 
and the use of it to meet the government's ex- 
penses, was practically rejected by all of the bel- 
ligerents. The expedient of "government notes" 
not redeemable in coin was employed on an ex- 
tensive scale in our Civil War; the economic 
meaning of them is that the government pays its 
current bills with its own promises to pay at an 
indefinite future date, forcing its creditors at 
home to accept such promissory notes as money. 
Under this contrivance a government may at 
least appropriate the services and property of its 
citizens, as bankrupt revolutionary France did 
after 1789, without the necessity of procuring 
actual money for the purpose. The incidental 
and very formidable evils arising from such in- 
flation of the currency with irredeemable and un- 
secured paper are well known. Prices of com- 
modities rise to heights entirely out of touch with 
those of the world at large, and in the end the 
currency thus created may become virtually 
worthless on the markets, like the assignats of 
France, the continental currency of our own 
Revolutionary War, and the paper money of the 
Confederate States. These very familiar con- 
siderations easily explain why the European 
belligerents of this war should not have employed 
the recourse. But the fact, nevertheless, remains 
that the recourse might have been employed and 



74 FINANCING THE WAR 

that it would have served to carry on the war. 
Therefore the absence of attempts to revive the 
old experiment of fiat money proved at least 
that economic exhaustion was not yet at hand. 



CHAPTER V 

FINANCIAL AMERICA AND THE WAR 

OF all the surprises which have marked the 
financial history of the war, none was more 
complete than what happened with the 
United States. After twelve months, in which, 
with increasing rapidity, the world had become 
politically and financially disorganized by the 
epoch-making conflict, this coimtry immistakably 
reached, in its relations with all other countries, 
a pinnacle of economic power and prestige never 
previously attained by it, and never imagined, 
in the form it actually assumed, imtil long after 
the outbreak of the war. 

The historian of the futiire will probably say 
that this was the quite inevitable result of the war 
itself. The six greatest European nations, includ- 
ing all of this coimtry's richest and most aggres- 
sive commercial rivals, were engaged in wasting 
their own resources and crippling the resources of 
one another. In one European country of high 
financial rank, the banks had been seized by the 
invading enemy and their resources virtually 
confiscated. From Paris $900,000,000 gold and 

75 



76 FINANCIAL AMERICA 

silver, the reserve of the Bank of France, had 
been hurriedly removed to a distant port to escape 
impending capture. Bombs were dropped from 
air-ships in the neighborhood of the Bank of 
England. Berlin was cut off, commercially and 
financially, from the rest of the financial world. 
What result more natural, under such circum- 
stances, than that money of foreign countries, 
seeking a surely guarded resting-place, should 
pour into the banking institutions of the greatest 
neutral state ? What other outcome was to be 
expected than that the foreign trade of this pow- 
erful neutral nation should expand to previously 
unimagined proportions ? 

Such, indeed, is to-day admitted by the whole 
financial world — now that we know what actually 
happened — to have been the inevitable logic of 
the situation. Yet there were several highly im- 
portant contributory causes which could hardly 
have been predicted in advance, and which cer- 
tainly were not predicted. Furthermore, this sud- 
den rise to overshadowing economic power and 
prestige is precisely what the high financial ex- 
perts, at the beginning of the war, had declared 
could not possibly happen. The United States 
was believed to be in great measure economically 
dependent on Europe. Two years before, it had 
been declared on well-known banking authority 
that even in normal times our annual dues to 



OUR INDEBTEDNESS TO EUROPE Tj 

Europe — for interest and dividends on American 
securities held by foreign investors, for payment of 
freights on foreign ships, and for remittances cov- 
ering expenditure by Americans Hving or travel- 
ling abroad — were so enormous as to exceed by 
more than $500,000,000 our normal excess of 
merchandise exports over imports. The difference 
had to be met through Europe's investment of 
capital in this country. Europe, the inference 
proceeded, could if it chose, even in an ordinary 
year, have called for payment of this $500,000,000 
debit balance in gold. Probably the estimate 
much exaggerated the actual situation. Still, it 
was based on facts which did exist. 

It is true that, during one remarkable episode 
of our financial history, fifteen years before this 
war, New York had indulged for a few months in 
the dream of becoming shortly the independent 
financial centre of the world — "displacing Lon- 
don" was at the time the favorite way of putting 
it. The course of events which led to that prema- 
ture expectation provides a curious parallel of cir- 
cumstance (though on a far smaller scale of opera- 
tion) with that of 191 5. England, in 1901, had 
been for a year at war with the Transvaal Repub- 
lic. London's financial markets were gravely dis- 
turbed; even that little conflict was costing the 
British exchequer a million dollars per day. The 
United States, in the half-dozen years after the 



78 FINANCIAL AMERICA 

panic of 1893, had been economizing and saving; it 
had put its currency in order and had estabHshed 
the gold standard beyond dispute. It had raised 
the two largest grain crops in its history at the very 
time when Europe's harvests failed; had thereby 
increased its exports to a figure in those days ut- 
terly amazing, and had witnessed such financial 
and industrial prosperity at home as promised 
unbounded possibilities. When, under all these 
circumstances, continental Europe began to clamor 
at the capture of its markets by our manufacturers, 
and when this was followed by the subscription of 
our bankers to $208,000,000 of the British war 
loans — the first ever sold by the exchequer to 
foreign subscribers — it was not strange that pre- 
diction of New York's coming supremacy in the 
financial world should have been the watchword. 
Reviewing that episode, after the later inci- 
dents in our economic history during the Euro- 
pean War, there is much in the nature of economic 
coincidence. But whatever, in the longer sequel, 
is to be the outcome of our country's rise to inter- 
national power after 19 14, the predictions of 1901 
turned out very soon to be illusions. A few ex- 
citing months, and our own most ambitious finan- 
ciers admitted reluctantly that at the height of 
our economic prestige we had really been using 
European capital, which came to New York of its 
own accord, because of America's temporarily 



BEFORE THE WAR 79 

great prosperity. Long before 1907, Wall Street 
was once niore openly borrowing by the hundreds 
of millions, and in every European money market, 

France and England had to help us out of that 
year's financial pitfalls. In the ensuing half-dozen 
years our financial markets continued to draw on 
Europe's capital, at a rate which suggested that 
such help was an immediate necessity. The 
spectacular incident in our markets of 1909 was 
the effort to induce the Paris Bourse to take over 
part of the capital stock of our largest joint-stock 
company, the United States Steel Corporation. 
In 1 9 10 our most powerful railways sold to the 
Paris market more than $50,000,000 of new se- 
curities. Between that year and 19 14 the reluc- 
tance of Europe to support our markets (for 
reasons of its own, already explained) caused great 
financial depression in this country. Even a 
borrower in such high credit as the city of New 
York, hesitating to press new bond issues on the 
American market, placed no less than $100,000,- 
000 of its short-term obligations with European 
bankers, and had to pay a high interest rate to 
get them placed. We shall hear of these New 
York City obligations again in the course of our 
present narrative; the great bulk of them hap- 
pened, unluckily, to fall due in the autumn of 
1914. 

Such was the position which, at the outbreak of 



8o FINANCIAL AMERICA 

the war, American finance seemed to occupy with 
relation to Europe. It was siirely no matter for 
astonishment — even when the logic of the situ- 
ation might have been plainly reasoned out on 
the lines suggested at the opening of this chapter 
— that the gloomiest forecasts of all, regarding 
the American outlook, should have come from 
conservative and experienced financiers. The 
most that even Wall Street ventured to predict 
of a hopeful nature, in the first two or three 
months of the European War, was that American 
exporters might capture the South American and 
Asiatic markets lost by Europe. The most that 
financial London had to say, by way of encourage- 
ment, was that when the war should end the United 
States might be brought, through its previous 
neutrality, to a position of high financial power. 
It must now be our task to answer the question, 
why every one of these high experts was wrong in 
his prediction, to see just what actually happened, 
and to determine why it happened. 

What happened first was of a character to con- 
firm the most unfavorable judgment. The New 
York Stock Exchange closed its doors on Friday, 
July 31, the day of London's closing. There was 
strong opposition to such action, on the stock ex- 
change itself, but it was silenced by evidence, 
presented to the officers of the exchange, that 
selling orders from Europe, already placed with 



CLOSING THE STOCK EXCHANGE 8i 

bankers and brokers for execution as soon as the 
exchange should open Friday morning, were of a 
magnitude and character such as to threaten the 
gravest consequences. Houses through which 
Europe's investing communities commonly made 
their purchases or sales on the New York Stock 
Exchange reported that every market in the world 
seemed to be making ready for the sale to New 
York at once of all the American securities that 
they could dispose of. It must be remembered 
that, with war now recognized as inevitable but 
with no protective financial measures yet adopted, 
there was a double motive for such sales at al- 
most any sacrifice. First, not a banking-house in 
Europe was sure of its own continued solvency; 
therefore the instinct which always governs the 
financial mind in time of panic — to convert in- 
vestments instantly into cash — operated with un- 
precedented violence in this greatest of all finan- 
cial panics. But, second, the European banking 
community's knowledge of the prodigious coming 
demand for capital by the belligerent govern- 
ments urged immediate preparation of the neces- 
sary free resources. 

Closing of all the European exchanges had put 
a stop to liquidation on those markets. Had the 
New York Stock Exchange reopened on July 31, 
it would have been the only great market in the 
world available for such sales; and foreign in- 



82 FINANCIAL AMERICA 

vestors held at the time, as subsequent expert in- 
vestigation pretty clearly proved, hardly'less than 
$4,000,000,000 of American securities. Of the 
great mass of foreign selling orders, awaiting exe- 
cution at the New York opening of the 31st, a 
very large number explicitly provided for ac- 
ceptance of bids as much as 15 or 20 per cent 
under the previous day's market. Some fixed no 
limit whatever on the price. When it is further 
stated that prices of such securities had already 
fallen 10 to 20 per cent in the few preceding days, 
and that the New York banks had loans out- 
standing in the hundreds of millions, based on 
pledge of these securities at their previous valu- 
ations, the reason why the board of governors 
closed the New York Stock Exchange is evident. 
The fact that after the exchange had reopened, 
five months later, this European selling was re- 
sumed on an extensive scale, yet without seriously 
disturbing the course ■ of prices, has occasionally 
raised the question whether New York might not 
safely have left its official market open after 
July 30, purchased the American securities thrown 
over by Europe, and thereby gained at once the 
international prestige which was actually achieved 
only after long delay. No one can absolutely 
prove a negative. Theoretically, at least, the 
thing might have been done. But it would iin- 
questionably have been done at the cost of far- 



THE NEXT TURN 83 

reaching insolvency. The New York Stock Ex- 
change at the end of July confronted world-wide 
panic. When it reopened in December, Europe 
as well as America had applied the necessary pro- 
tective measures; panic, at least, was over. The 
foreign selling of our stocks and bonds during 
1 91 5 was orderly and deliberate; only as much 
was sold from day to day as the market would 
take without break in prices. The banks, as we 
shall presently see, were able then to facilitate 
the process. But the immediate course of events, 
after July 30, 19 14, showed how ill-prepared they 
were for such service at the time. Even supposing 
New York to have surmoimted the "war panic" 
of midsummer, 19 14, without shutting the doors 
of its stock exchange, the failures which must 
have followed could scarcely have been limited 
to Wall Street brokers. If deposit banks had 
also closed their doors in the frantic rush of stock- 
market liquidation, the shock would have reached 
the bank-depositing public and the domain of 
general industry. 

It was, in fact, immediately evident that the 
crisis had by no means been averted by the clos- 
ing of the stock exchange. Nobody knew what 
would be the next turn of international finance. 
Nobody knew whether panic would not break out 
among bank depositors. Whatever protection the 
closing of the stock exchange may have given in 



84 FINANCIAL AMERICA 

other directions, the banks at any rate had lost 
through it the opportunity of selHng their own 
securities, and thereby fortifying their cash re- 
sources. With the situation thus obscure and 
menacing, the banks of New York, followed by 
those in other American cities, promptly adopted 
two emergency expedients. One had never been 
employed except in time of panic; the other had 
never previously been employed at all. 

The first was the issue of what were called 
"clearing-house loan certificates." This expedi- 
ent (originally designed solely to enable one or 
more embarrassed banks to protect their own 
cash reserve) permitted such institutions to use 
interest-bearing due-bills instead of cash, when 
paying for checks drawn against them, deposited 
with other banks for collection, and presented 
for payment by such other banks. But the plan 
never worked within those limits. Since every 
bank in a given clearing-house had an equal 
right to "take out clearing-house certificates," 
and since every bank was confronted with a 
possible "run," the process soon came to mean 
that all the banks of a given city would suspend 
cash payments to one another. This in ttun in- 
variably caused suspension of cash payments to 
depositors, or at least restriction of their cash 
withdrawals to small sums. The consequence had 
been, in each of our greater panics, that employers 



CLEARING-HOUSE CERTIFICATES 8^ 

of labor could not draw from their bank-accounts 
the cash required to meet their weekly pay-rolls. 
In the panics of 1907 and 1893, currency was 
bought and sold on Wall Street at a premium as 
high as 4 per cent, the $104 asked by the brokers 
for $100 actual money being paid in certified 
bank checks. During the panic of 1907, there 
were outstanding, in the various cities of the 
United States no less than $227,114,000 clearing- 
house loan certificates; they remained in use at 
New York during twenty-two successive weeks, 
and the "premiimi on currency" lasted two full 
months. In 19 14, the maximum amount at any 
time outstanding was $195,754,000. 

The suspension of cash payments at the 
banks, and the currency premiimi at New York, 
would presimiably have occurred again in Au- 
gust, 1 914, but for the second and novel expedient 
adopted by the banks. Such conditions might, 
indeed, have lasted longer even than in 1907; 
for in that year the crisis was reHeved by immedi- 
ate import of almost $100,000,000 gold from 
Europe, whereas the five months after war broke 
out in 1 9 14 were marked, as we shall see, by ex- 
port of an exactly equal simi. Simultaneously, 
however, with the recourse to clearing-house loan 
certificates the so-called "Aldrich-Vreeland Law" 
of 1908 was put into operation. 

That law passed Congress a few months after 



86 FINANCIAL AMERICA 

the panic of 1907; its purpose was to establish 
machinery for rapid increase of the currency in 
panic time, and thereby to avert such hoarding of 
money, drawn from bank reserves and other or- 
dinary channels, as locked up from circulation, 
toward the end of 1907, no less than $296,000,000. 
A properly elastic currency-issue system, such as 
exists to-day, would have served the purpose; 
prospective money hoarders would have got noth- 
ing but new bank-notes. But long discussion and 
debate were necessary before a law with the 
requisite scope and detail could be framed, and 
the "emergency-currency law" of 1908 was en- 
acted to bridge over the intervening period. The 
older law permitted national banks to issue 
notes only on pledge of United States bonds with 
the government; this was a slow and greatly re- 
stricted process. The "Aldrich-Vreeland Act" 
authorized instantaneous issue, within carefully 
prescribed limitations, of currency based on the 
pledge of other assets of the banks, such as ap- 
proved notes of mercantile borrowers. In the 
six years up to August, 19 14, no bank had applied 
for such "emergency currency"; but the notes 
were engraved, held by the government, and kept 
ready for immediate delivery. They were put 
out without delay in 19 14. By the 3d of August 
$46,000,000 of them were in the hands of New 
York banks. Depositors who asked for cash were 



" ALDRIGH-VREELAND LAW 87 

paid in this new currency (which in form was 
hardly distinguishable from the old-time bank- 
notes), and the banks retained the gold and legal- 
tender currency in their reserves. 

This machinery, then, provided without any 
fresh legislation that immediate relief which 
Europe obtained only through new and hastily 
contrived expedients. It is a highly interesting 
fact that English bankers were at work on plans 
for a similar special currency at the very moment 
when the war broke out. It was to have provided 
for additional note issues in time of stress, secured 
one-third by gold and two-thirds by negotiable 
securities. The private London banks and the 
British Government had favored it; the Bank of 
England opposed it, "The bankers," one of the 
committee subsequently wrote, when describing 
the August bank panic at London, "iinderstood 
that the opposition either was or would be with- 
drawn ; but it was too late. ' ' The alternative plan 
of "currency notes" had to be adopted. 

The results of the application in this country, 
of the statute of 1908, were most important. But 
so violent was the shock of panic that they were 
slow in operation. In the three weeks between 
the end of July and the middle of August, 19 14, 
actual money in the reserves of New York banks 
decreased $83,000,000; nearly all of the decrease 
being gold. Under the old national bank law 



88 FINANCIAL AMERICA 

then in force, city banks were required to keep on 
hand in "lawful money" (a technical term which 
did not apply to the new "Aldrich-Vreeland 
notes") 25 per cent of the amount of their de- 
posits. On July 25 they held $25,127,000 more 
than that requirement; on August 15 the actual 
deficit below the 25 per cent was $47,992,000. 
Nevertheless, it soon appeared that no induce- 
ment for continued hoarding existed any longer, 
when banks were freely providing customers with 
the currency issued under the law of 1908. 

So much had been accomplished; yet after 
all it had only served to check one symptom of 
the panic. There was little in the situation, 
during the three or four months which immediately 
followed the outbreak of the war, to foreshadow 
any other favorable change. It was during those 
few months that prediction as to the influence of 
the European War on this country's economic posi- 
tion was most hopeless. Between July and No- 
vember, 1 9 14, the outlook for American prosper- 
ity seemed, even to trained and practical financial 
observers, to be altogether dark. 

There was abundant reason for misgiving. 
Quite apart from the disturbing possibiHty that 
Europe would call for instant repayment of the 
enormous sum of capital invested in the United 
States — an achievement as impossible for our mar- 
ket as a bank's immediate payment in cash of all 



IN THE FIRST MONTHS OF WAR 89 

the deposits on its books — the entire framework of 
finance, commerce, and industry had been shat- 
tered by this mighty blow. During the first few 
weeks of war, the country's maritime export trade 
came almost to a halt ; ships with cargoes already 
on board were afraid to risk the chance of seizure 
by cruisers of the belligerent powers. When 
England had chased the hostile cruisers from the 
sea and the ocean highway was reopened, our 
lucrative trade with Germany had disappeared. 
In the five last months of 19 13 we had exported 
$186,000,000 worth of merchandise to that coun- 
try. In the same five months of 19 14 we shipped 
only $2,200,000. This country's total export 
trade in August decreased $77,000,000 from the 
year preceding; for September and October com- 
bined, the decrease was $138,000,000. This was 
no favorable omen for the payment of our ac- 
cruing foreign dues, as usual, in merchandise. 

Not only, in fact, were shipping facilities sud- 
denly and heavily reduced, but the shock to inter- 
national credit had instantly impaired the buying 
power of neutral coimtries, while the question what 
belligerent Europe could purchase from America 
was entirely obscure. It is true that the wheat 
market is traditionally stimulated by war, and 
that the wheat crop just reaching harvest in the 
United States, when war began, was the largest 
which we had ever harvested. In that branch of 



90 FINANCIAL AMERICA 

export trade we shall encounter highly interesting 
developments later in our narrative. But the 
cotton-growing industry, though that crop also 
produced in 19 14 the second largest harvest of 
our history, found itself for that very reason in a 
dangerous predicament. 

More than half of our yearly crop of cotton is 
sold and shipped to Europe, the value of that ex- 
port having risen as high as $600,000,000. But 
Germany was our cotton trade's second largest 
foreign customer; her market was cut off, while 
the textile industry in the rest of Europe, along 
with other manufacturing activities, was para- 
lyzed by the shock of war. In September, Octo- 
ber, and November, normally the months of large 
shipments from the newly grown cotton crop, the 
country's cotton export footed up in 19 14 less by 
$218,000,000 than in the corresponding months of 
the year before. The prospect seemed to be that 
possibly one-third of our crop of 19 14 would be 
left on the planters' hands. Now the South not 
only depends on its sales of cotton for its income 
of the season, but it had spent large sums, often 
of borrowed money, for wages, rent, and materials. 
An outcry arose at once that the South was facing 
ruin. Excited congressmen proposed that the 
national treasury lend $500,000,000 to the plant- 
ers; that currency be issued on the security of 
cotton; that the government guarantee a profit- 



COMMERCIAL DIFFICULTIES 91 

able price for cotton, which was then falling rapidly 
on the market. Efforts were made to start a 
nation-wide canvass for the purchase of a bale 
of cotton apiece by charitable citizens, and in the 
end a fund of $135,000,000 was conditionally 
pledged by banks throughout the country to lend 
against cotton and save the South from ruin. 

As was shown by the event, this cotton-market 
panic was unreasonably exaggerated; the South 
shared fully in the country's later war-time pros- 
perity. Still, it was one discouraging sign of the 
early autimin of 19 14. While this was going 
on, our manufacturing industry was beginning to 
discover that many hitherto indispensable raw 
materials, such as dyestuffs and chemicals, were 
apparently cut off from access to our markets. 
Production slackened rapidly in the steel and cot- 
ton-spinning trades. Bank checks drawn in the 
whole United States during August decreased 19 
per cent from the year before; in September 
and October the decrease was 25 per cent. This 
pointed to such shrinkage in actual business ac- 
tivities as had been familiar only in periods of 
severe depression. 

With foreign trade and home industry thus de- 
ranged, there remained the question of our in- 
debtedness to Europe. The protective measures 
already taken in the banking and currency situa- 
tion dealt solely with the financial crisis at home. 



92 FINANCIAL AMERICA 

The closing of the stock exchange merely pro- 
tected us, temporarily, from Europe's sales of 
American securities. Neither guarded against the 
sudden and urgent recall of capital in other forms. 
Our markets were heavily in debt to Europe, not 
only through American stocks and bonds held by 
foreign investors but through loans coming to 
maturity almost daily. England, our largest 
creditor, was calling for instant payment, and we 
could not blame her for it. Her own necessities 
were lu-gent. Loans due to her from the Euro- 
pean Continent were non-collectible because of 
the war; loans due from nearly all other neutral 
countries were non-collectible because of the mora- 
toriums. There was no war and no moratorium 
at New York, and London called on the New York 
market to pay what it owed. 

It seemed inconceivable that New York could 
meet the call. In the last week of July $42,- 
000,000 gold was taken for export to Europe; no 
outgo on such a scale could continue very long 
without eventually exhausting the available gold 
reserve of both banks and government. New 
York's "par of exchange" with London is $4.86^, 
which means that an English gold sovereign is 
intrinsically worth that amount in American cur- 
rency. The usual cost of freight and insurance, 
with the temporary loss of interest on the money, 
is such that the rate of exchange may rise, say to 



THE HIGH EXCHANGE RATES 93 

$4,885^ or $4.89 in the pound sterling, before it 
will be profitable to send gold from New York to 
London. Ordinarily the rate can go no higher, 
since at that figure the gold may be obtained and 
shipped. But during the five last days of July, 
when financial London was falling into panic, 
New York exchange rose successively to $4.91^, 
to $4.95, to $5, to $5.50, and, finally, on August 
4 — the day of Great Britain's ultimatimi to Ger- 
many — to $7 in the pound sterling. 

No rate anywhere near to this had ever been 
reached in the history of the New York market. 
Since the rate of exchange thus touched was im- 
possible with gold shipped freely to London, to 
pay the balance of international indebtedness 
against New York, and since $4.86^^ to the pound 
sterling was the intrinsic parity of exchange, the 
$7 rate meant, theoretically, that the American 
currency was depreciated 4H per cent on the 
foreign market. We shall encounter this measure- 
ment of currency depreciation again in the later 
chapters of the economic history of the war. Of 
this particular episode, it is enough to say that 
the depreciation was quite artificial, for two rea- 
sons. A treasure ship could not be trusted to 
make the passage from America to England; 
there was therefore no limit to the price in dollars 
which might have to be paid by a New York 
banker whose obligations in London were falling 



94 FINANCIAL AMERICA 

due, for a draft redeemable at London in pounds 
sterling. But it was also an artificial depreciation 
because the treasury continued freely to redeem 
the American currency in gold. 

But, on the other hand, it soon began to ap- 
pear, even after the British fleet had driven Ger- 
many's ships from the sea, that the New York 
banks were not disposed to give up gold for ex- 
port. The loss of the $42,000,000 gold for that 
purpose, at the end of July, had shaken the 
financial community's nerves. If, in response to 
London's calling in of its foreign credits, shipment 
of gold had continued at that weekly rate, the 
$308,900,000 gold in the vaults of New York's 
banks on August 15 would have been exhausted 
in less than two months. A run on the treasury 
reserve, to get gold in exchange for government 
legal-tender currency, would apparently have fol- 
lowed. 

Furthermore, the New York bankers pointed 
to the fact that the moratorium on debts, pro- 
claimed by the British Government, applied to 
indebtedness due by English bankers to American 
creditors. Why, therefore, should gold be sent 
to London to pay what New York bankers owed 
in that city ? On the face of things, the American 
money market seemed to be on the verge of join- 
ing Europe in her confession of financial helpless- 
ness. New York had almost established, auto- 



PROBLEM OF NEW YORK 95 

matically and without governmental sanction, a 
moratorium of its own on foreign obligations, and 
among those obligations were the short-term bonds 
of the city of New York, falling due and payable 
in Europe before the end of 19 14. 



CHAPTER VI 
THE NEW YORK MARKET'S ACTION 

THE decision which the New York banks 
were now compelled to make was of crit- 
ical importance; but the true nature of 
the crisis was imperfectly understood. In the 
highest financial circles, opinion divided sharply. 
Should New York, tmder the plausible pretexts of 
the moratorium on London's own external debts 
and of the danger threatening this country's gold 
supply if we met the instant claims of foreign cred- 
itors, postpone payment of its own maturing for- 
eign indebtedness ? Or should such payment be 
made on the spot, regardless of consequences ? 
There was much to say for either alternative. Prob- 
ably, during the first few weeks of war, the pre- 
vaiHng judgment, even among experienced bank- 
ers, favored the first-named policy. Much that is 
clear to-day, in the light of subsequent events, 
was altogether obscure in August, 19 14. Ideas 
regarding both present and future were still col- 
ored deeply by the conviction that the basis of 
credit had been absolutely broken down; that 
the catastrophe involved in Europe's political 

96 



LONDON'S EXPECTATIONS 97 

and economic crisis was imminent, worid-wide, 
and unavoidable; that imless peremptory pro- 
tective measures were adopted, reversion to prim- 
itive methods of international exchange would 
force every debtor country to the wall when 
creditor countries grasped at its resources. The 
United States was one of these debtor countries. 
Why, then, did not its only rational policy lie in 
imitating belligerent Europe and suspending pay- 
ment of international debts ? 

What would have been the outcome in the 
country's immediate economic future, if that 
poHcy had been adopted, it is somewhat difficult 
to say. We have evidence of what financial 
Europe thought. Writing when the actual de- 
cision was still hanging in the balance, a well- 
known London financial expert, later appointed 
special adviser to the British exchequer, declared 
that the existing crisis "was the chance of a cen- 
tury for New York." A neutral market which 
had promptly paid its own international bills in 
gold, and had granted credit to other hard-pressed 
debtor countries, "would have stepped straight 
onto London's financial throne and set London a 
very difficult task to regain it after the war was 
over." But America "feared to use its gold, and 
held on to it as tightly as it could, fearful of in- 
ternal trouble and a nm on its banks if too much 
of the metal went abroad." The result was "the 



98 NEW YORK MARKET'S ACTION 

depreciation of the American dollar as compared 
with the pound steriing." "It was the chance of 
a century; but New York could not take it." 

A month or two later, this London expert 
would hardly have thus described the policy of 
financial New York. Four months later, he might 
have been compelled to draw a different con- 
clusion as to the possibility of New York's dis- 
placing London. But what the London critic 
obviously meant was that if the American mar- 
ket had surrendered, had followed the rest of the 
neutral world in suspending international pay- 
ments, it would thereby have publicly proclaimed, 
at the very outset, its inability to stand alone, and 
would have joined the long list of banking and in- 
vesting centres in whose custody foreign capital 
could not be placed with any certainty of getting 
it promptly back again when needed, or of re- 
covering it at all, except at a rate of exchange 
which would not recover its original face value. 
We shall presently see what moral effect was pro- 
duced on foreign depositors, both by the action 
of Great Britain in proclaiming a moratorium and 
by the action of the American commimity in 
rejecting any form of that expedient. For the 
policy of arbitrary debt suspension was rejected 
— not by edict, nor even by general consultation 
and consideration, but by bold and courageous 
grappling with the first concrete case. 



THE NEW YORK CITY BONDS 99 

It was fortunate that this case presented a 
clean-cut issue. At London, there were about to 
fall due £13,494,000 in notes of New York City; 
at Paris, 61,500,000 francs. Payment in gold at 
those cities, on the stipulated date, was nomi- 
nated in the bond. Two or three New York bank- 
ers accepted this situation as the crucial test, and 
called on the banks of the city to provide for the 
payment. Their task was not easy. No one 
institution could provide single-handed the $80,- 
000,000 gold required for export; if done at all, 
the work must be done by joint action of all the 
largest banking institutions. So great was the 
hesitancy of responsible bank officials that the 
only argument which eventually broke down op- 
position in some important quarters was the blunt 
declaration that "if the credit of New York City 
goes by the board, all the rest might as well go 
with it." 

But the credit of New York City did not go by 
the board. The New York banks subscribed to 
a new $100,000,000 bond issue of the city, each 
bank agreeing not only to pay the stipulated price 
for its allotments, but to provide, in the ratio of 
its individual subscription and in gold or in bills 
of exchange convertible into gold at London, its 
share of the $80,000,000 European obligation. 
With a view to avoiding the still-existent risks of 
ocean transit, the Bank of England established a 



100 NEW YORK MARKET'S ACTION 

branch at the Canadian Government depository, 
Ottawa, agreeing to accept gold payments at that 
point as made in London. To that destination, 
something Hke $35,000,000 gold was exported from 
New York as the city's European loans came, one 
after another, to maturity. 

As always happens in such circumstances, the 
smoothness with which this large transaction was 
completed paved the way for further concerted 
action on the problem of international payments. 
The "New York City loan pool" went into opera- 
tion in the middle of September. By the close of 
the same month arrangements were under way, 
on a very much larger scale, for shipment of gold 
to meet the remaining balance of international 
indebtedness against us. This was a far less 
simple operation than the financing of New York 
City's debt. Since in this instance it was impossi- 
ble to measure the full scope of the foreign claims 
beforehand, it woiild clearly have been imprudent 
to begin by trusting to unregulated export of 
gold, whose increasing magnitude might, in the 
prevalent uncertainty, have ended by throwing 
the subscribing bankers into panic. 

The course pursued, therefore, was the inviting 
of banks throughout the United States to sub-, 
scribe (as nearly as possible in the ratio of their 
cash resources) the sum of $100,000,000 gold; 
from which fund the gold required for export, 



GOLD PAYMENT MAINTAINED loi 

in order to adjust the unfavorable balance of ex- 
change, should be drawn and shipped to Ottawa 
for account of London. This remarkable opera- 
tion was directed by a committee of bank officials 
with nation-wide reputations, who were to call up 
the subscriptions of gold pro rata, as fast as actual 
export needs developed. Beginning at the open- 
ing of October with an actual shipment of $io,- 
000,000 to Ottawa, this undertaking made clear 
to all the world the meaning of the newly adopted 
attitude of American financiers. 

Its moral effect on international opinion was 
very great. It is an axiom of banking that the 
way to stop a "run" is to give public and tangible 
evidence of readiness to pay. The bank depositor 
who rushes to the paying-teller's window, insist- 
ing that his balance be paid at once in cash, and 
who finds that official with a pile of gold or cur- 
rency at his elbow, cheerfully handing out the 
cash to applicants, is extremely apt not alone to 
change his mind about withdrawing his deposit, 
but to pass along to the receiving-teller's window 
with a new deposit. That very human instinct, 
entirely familiar in the case of humble individuals, 
displays itself as invariably in the larger field 
of banking operations; with capitalists, commu- 
nities, and nations. The action of the "bankers' 
pool" was closely watched, in Europe as in New 
York. When it was seen that $8,000,000 to $10,- 



102 NEW YORK MARKET'S ACTION 

000,000 gold per week was quietly being drawn 
from the banks and shipped to Ottawa, exactly 
that result ensued which occurs when the paying- 
teller promptly meets all demands of bank de- 
positors in a "run." In this larger instance of 
what had seemed to be a run by Europe on the 
gold reserve of the United States, the American 
bankers' systematic shipment of gold to the Bank 
of England's branch in Canada — the total gold ex- 
port from this country between August i and 
December 31 being no less than $104,900,000 — had 
the visible effect, first of reducing Europe's de- 
mands for immediate payment of our interna- 
tional indebtedness; then, in due course, of draw- 
ing capital from abroad to the United States. 
Under these various influences New York ex- 
change on London had returned, by the last week 
of October, 19 14, to the rate of normal times. 

But New York had not yet been disentangled 
from the complications in which the whole finan- 
cial world had become involved when war began. 
American bank reserves and American currency 
were still imder artificial influences. Clearing- 
house loan certificates were only gradually aban- 
doned ; new issues of the sort were made by New 
York banks as late as the middle of October, and 
at that same date the "Aldrich-Vreeland" bank- 
note issues, confessedly an emergency expedient, 
were almost at their maximum. What was possi- 



POSITION IN OCTOBER 103 

bly even more to the point in its bearing on our 
international financial prestige, the New York 
Stock Exchange was still closed for business. 
Foreign capital, whether from belligerent or neu- 
tral markets, might doubtless now be deposited 
in American banks, with confidence that it would 
be returned on demand in gold. But conversion 
into cash of foreign capital invested in American 
stocks and bonds, or conversion of cash into such 
securities, continued to be impracticable. We are 
now to see in what way these three impediments — 
the emergency bank-reserve money, the emergency 
paper currency, and the emergency embargo on 
sales of stocks and bonds — were next to be re- 
moved. 

The clearing-house loan certificates disap- 
peared automatically, as they have always done 
when panic has disappeared, hoarding of cur- 
rency has ceased, and cash in the bank reserves 
has risen to normal proportions. Before the end 
of October, notwithstanding the large export of 
gold from New York since July, the sum total of 
gold and United States notes in New York bank 
reserves (which had at one time fallen $61,000,- 
000 below the figure of August i) was within two 
millions of the August figure, and the "surplus 
reserve" was restored, for the first time since that 
date; by November 28, all of the loan certificates 
that the New York banks had issued were re- 



104 NEW YORK MARKET'S ACTION 

deemed and cancelled; by December 14, none of 
them was left outstanding in the United States. 

The "emergency bank-notes" of the law of 
1908 — of which $384,500,000 were in circulation 
in the later autumn of 19 14 — were subject to a 
tax which increased gradually as time went on 
and the notes were not redeemed. The tax had 
not yet arrested the employment of this currency; 
for the banks were still surrendering gold for ex- 
port, financial judgment as to what would happen 
next was doubtful and suspicious, and no one was 
disposed to give up so serviceable a safeguard 
against another shock to public confidence. But 
at the moment when the financial ship was be- 
ginning in many other ways to right itself, an 
achievement of the first importance settled the 
question of the currency. It is fair to describe 
what happened as a remarkable coincidence — a 
windfall of the most timely and extraordinary 
good fortune to the United States. 

Long before war in Europe had been discussed 
in America as a present possibility — as far back 
as the later months of 19 13 — the Wilson adminis- 
tration had devoted all its energies to effecting 
the passage of a proper currency and banking law. 
I shall not attempt to describe the numerous and 
complex provisions of this statute, or to narrate 
the somewhat confused phases through which 
the act, very imperfect as originally framed, was 



THE FEDERAL RESERVE LAW 105 

at last amended into shape insuring a scientific 
modem system. The essential aspects of the law 
which received the President's signature in De- 
cember, 1 9 13, were these: Instead of leaving every 
bank to use or misuse its own reserve of cash in a 
time of stress or panic, it established twelve cen- 
tral institutions in as many districts of the coun- 
try, each "reserve bank" to hold in its own vaults 
the bulk of the cash reserves of banks within its 
district. 

Thus held, the "gold and lawful money" could 
still be counted as part of the reserve of every 
"member bank." In return for such surrender of 
cash reserves, each central institution was bound 
to rediscount on request loans already carried 
by member banks; in other words, to lend to a 
member bank, at a fixed rate of interest and on 
security of the merchants' paper which was the 
basis of the member bank's own loan, the money 
originally advanced to mercantile borrowers by 
that member bank. This process meant that when 
requirements for credit on the part of their busi- 
ness clientage were greater than the individual 
banks could meet, in their existing position of 
reserves, part of the burden might be shifted to 
the reserve bank of the district. The loan or 
"rediscount," thus obtained by a member bank 
from its central institution, was to take the form 
of a credit balance in the reserve bank. That 



io6 NEW YORK MARKET'S ACTION 

credit balance the member bank might count as 
part of its own reserve; or the member bank, if 
it so desired, might draw on its balance, receiving 
the new currency known as Federal Reserve notes. 
These notes, though not themselves available for 
bank reserves, were available for all the uses, in 
hand-to-hand money circulation, belonging to the 
national bank-notes which they were intended to 
replace. 

The nature of the notes and bills rediscounted, 
and the term for which they were to nm, were 
carefully prescribed in the statute; the total 
amount rediscounted for any member bank was 
not, under ordinary circumstances, to exceed one- 
half of its capital and surplus, and was never to 
exceed the whole of those two fimds. Against all 
deposits credited to member banks, through re- 
discotmt of their loans or otherwise, the Federal 
Reserve Bank must maintain in its own vaults 
3 5 per cent in specie or government notes. Against 
all note circulation issued by a Federal Reserve 
Bank to a member bank, and by it paid out to 
the public; the reserve bank must maintain a 
reserve of 40 per cent in gold. Finally, in order 
that the twelve reserve banks of the twelve al- 
lotted districts should be held to a harmonious 
general policy, and in order to insure their tmited 
action in a financial crisis, a so-called Federal 
Reserve Board of seven members — two of them 



A " PSYCHOLOGICAL MOMENT " 107 

government officials and five named separately 
by the President of the United States — ^was cre- 
ated, with wide supervisory and restrictive powers 
over the entire system. 

Such, in its general outlines, is the machinery 
of the banking and currency system enacted at 
the close of 19 13. No one imagined, when the 
law was passed, that urgent necessity for be- 
ginning its operation was so near at hand. Its 
actual introduction was in fact accomplished 
rather slowly. It was three or four months be- 
fore the prescribed committee had arranged the 
twelve districts and the location of the twelve 
reserve banks. Not imtil one week after the out- 
break of the war was the Federal Reserve Board 
itself completed, and it was several months more 
before the new reserve banks were actually or- 
ganized. At length, on November 16, the new 
banking and currency system went into force. 
Its inauguration was followed by retirement of 
the $384,500,000 emergency bank-note currency, 
which was taken up so rapidly, through issues of 
the new Federal Reserve notes, that before the 
middle of 191 5 it had wholly ceased to exist. 

It will not have escaped the reader's notice that 
the new banking system entered on the scene at 
what may be termed the exact psychological mo- 
ment. New York had publicly resumed payment 
of its maturing foreign debts in gold. Foreign 



io8 NEW YORK MARKET'S ACTION 

exchange, whose rates had for three months run 
so abnormally against New York, was back to 
the normal level. "Loan certificates" at the 
banks were nearly all called in; "surplus re- 
serves" at those institutions were restored. Now 
came that thoroughgoing reform of our banking 
and currency system, without which, financial 
Europe had for years declared, the United States 
could not aspire to high international prestige, 
and with which it was equally predicted we should 
win the full jBnancial confidence of the outside 
world. All this series of propitious events had 
occurred in that notable month, November, 1914. 
To remove all doubt and misgiving which might 
still exist, on the part of other markets, there re- 
mained only one achievement — the reopening of 
the New York Stock Exchange to unrestricted 
transactions by the home and foreign investor. 

None of the previous efforts to restore normal 
conditions — not even the decision to export gold 
in payment of our foreign debts — was surrounded 
with quite so much uncertainty as this. Of all 
the gloomy predictions made during August in 
regard to the war's effect on American finance, 
the surest and most logical seemed to be that 
Europe at the first opportunity would sell its three 
or four thousand millions of American securi- 
ties at the best price obtainable. It had mani- 
festly been doing that very thing when the stock 



WALL STREET AND EUROPE 109 

exchanges closed their doors on July 30, before the 
prodigious war expenditure had begun. Now, 
however, with 191 4 drawing to a close. Great Brit- 
ain was preparing to float a war loan of no less 
than $1,750,000,000, Germany was about to bor- 
row $1,000,000,000, and the other belligerents had 
similar plans on foot. War loans of even greater 
magnitude were immediately impending. No 
such requisition on Eiu-ope's capital had been wit- 
nessed in history. The inevitable sequel seemed 
to be that all investment holdings of the European 
public, which could be turned into cash on other 
than European markets, would be sold at once to 
raise the funds for subscription to the war loans. 
But if this seemingly certain policy were to be 
pursued, what could avert a 25 or 50 per cent de- 
cline in prices on the New York Stock Exchange, 
with the complete derangement of the credit sys- 
tem which had apparently been imminent when 
the stock exchange closed its doors ? 

Such was even now the reasoning of the stock 
exchange committee. It was not, however, now 
accepted imqualrfiedly by the financial commu- 
nity as a whole. What was suspected at the time, 
and what has been proved conclusively by subse- 
quent events, was this: The enormous sales of 
our stocks by Europe in July had been an incident 
of panic, and panic was now averted. Even if 
foreign investors were to sell, they would now sell 



no NEW YORK MARKET'S ACTION 

cautiously and deliberately, with a view to getting 
the highest price obtainable. Finally (and this 
suggestion, though at the time considered very 
daring, turned out to be entirely correct) the im- 
mense financial prestige gained by the United 
States, in refusing to join the world-wide rush 
for a moratorium on debts, must so far have con- 
vinced the foreign capitalist of the soundness of 
the American situation that he would hold to 
what he had of them already and, if he sold at 
all, would sell reluctantly and slowly. 

The stock exchange proceeded cautiously; but 
it was not left wholly in the dark. No market in 
which a large number of people really wish to 
trade can be absolutely suppressed, and after the 
stock exchange had closed down on Jtdy 30, it 
was not long before a group of individuals met on 
the sidewalk in the neighborhood of Wall Street, 
to experiment in buying and selling what was no 
longer bought or sold on the stock exchange. It 
was an irregular and unrestricted market ; stock- 
exchange houses were forbidden to deal on it, and 
both banks and stock-exchange officials did their 
utmost to checkmate its activities. Nevertheless, 
the market in the street survived and flourished. 
Made up at first, perhaps, only of wagers by 
venturesome gamblers on the probable value of 
securities, this so-called "outlaw market" pres- 
ently showed signs that bona-fide buying and sell- 



THE "STREET MARKET '* iii 

ing orders were being executed in it. It must be 
remembered that the pressure for some avenue to 
trade in investment securities was very great. 
Estates must be closed out ; holders of stocks and 
bonds have other uses for the money ; people with 
an idle fund in bank wish to invest it, without 
waiting for reopening of a stock exchange. 

By autumn, even the banking offices were keep- 
ing on file the daily printed circulars quoting 
prices of the "outlaw market." During the 
early auttmin, prices on that market went below 
even the closing prices of the final panic day, 
July 30. By the middle of October, important 
stocks were selling 10 per cent or more under that 
day's quotations. Then, along with the numerous 
favoring developments in the financial situation 
generally, an tuimistakable buying movement 
showed itself. It grew more active; within six 
or seven weeks the ' ' outlaw market ' ' had recovered 
most of the losses previously reported, and prices 
were again pretty nearly at the end-of-July level. 

These things had happened in the face of the 
most vigorous opposition by stock-exchange offi- 
cials. But meantime the stock exchange itself had 
not been wholly idle. In the third week of Septem- 
ber permission was given for members to buy or 
sell bonds to one another; though all such sales had 
first to receive the approval of a special commit- 
tee, and no sales were permitted below a level of 



112 NEW YORK MARKET'S ACTION 

prices fixed arbitrarily a trifle under the closing 
quotations of July 30. In the middle of October, 
similar opportimity was granted to deal in a 
limited list of high-grade stocks. All this was done 
without the formal resumption of business on the 
stock exchange. Finally, on November 28, the 
doors of the exchange — closed during four con- 
secutive months, whereas never before in Wall 
Street history had such suspension of business 
lasted longer than ten days — were officially re- 
opened. 

The date itself was interesting. It was six 
weeks after the surplus in New York bank re- 
serves had been restored; not quite two weeks 
after the new banking system had gone into 
operation; aknost exactly a week after exchange 
on London had returned to normal parity, with 
consequent cessation of gold exports. It was 
also, by an appropriate coincidence, that very 
day on which the last of New York's clearing- 
house loan certificates was cancelled. Even now 
the stock-exchange officers proceeded with some 
misgiving. At first, open trading was permitted 
in bonds alone; a list of "minimimi prices," close 
to actual prices of July 30, was published, no 
sales were allowed below that minimimi, and 
speculative purchases or sales were rigorously 
forbidden — only transactions involving immediate 
cash payment being admitted. It was also stipu- 



STOCK EXCHANGE REOPENS 113 

lated that every sale made on foreign account 
vshould be so stated to the stock exchange com- 
mittee. These extreme precautions showed that 
apprehension of a "20 per cent all-around de- 
cline" had not yet been removed. But prices 
quoted, on this resumption of official trading, 
gave no indication of a downward tendency. 
They did not even stay at the arbitrary "mini- 
mums"; instead, a gradual advance ensued. 

After two weeks, therefore, stocks as well as 
bonds were admitted to this limited open trad- 
ing, though with the same restrictions. The re- 
sult surprised all Wall Street; for prices, instead 
of hesitating around the "minimums," began at 
once a vigorous advance, and before the month 
was ended had moved up in many instances 8 
per cent or more. This advance continued into 
the new year, 191 5. On April i all special re- 
strictions of whatever sort on stock-exchange 
trading were removed. Home and foreign hold- 
ers of American securities were invited to sell 
what they should see fit on the New York market. 

This announcement was the final expression of 
financial America's full confidence in its own 
position. It removed from the New York mar- 
ket the last protective expedient of the war panic 
of 1 9 14. Considered along with the notable in- 
cidents which had preceded the stock-exchange 
resumption, and with the further fact that no 



114 NEW YORK MARKET'S ACTION 

investment market in the world, outside the 
United States, had returned to normal and un- 
restricted business, the effect on foreign financial 
sentiment was profound. A new and very ex- 
traordinary chapter in our economic history had 
begun. 



CHAPTER VII 

THE SECOND PERIOD 

WE have now reached a point in our sur- 
vey of the period where it is possible 
to see as a whole, and in their relation 
to one another, the makeshifts through which the 
civilized world, eastern and western hemispheres, 
belligerent and neutral states, struggled out of 
the convulsion which shook the economic firma- 
ment when the war broke out. Expedients, the 
suggestion of which would have been met with 
scornful incredulity a few weeks before August, 
1914, and policies which, even when formally 
proclaimed, seemed merely to be the snatching at 
momentary support to escape complete financial 
shipwreck, had now — such was the logic of the 
events which had crowded on one another — taken 
their place as a consistent chapter in economic 
theory and practice. 

This series of preliminary episodes may perhaps 
be best characterized as the fight of the civiHzed 
world to avert the greatest panic in economic 
history. The general insolvency which had been 
so widely predicted in advance was escaped, as 
we have seen, partly through the support, on a 

IIS 



ii6 THE SECOND PERIOD 

quite unheard-of scale, of private by public credit ; 
partly through temporary suspension of payments, 
not on the part of individual banks or markets 
but of communities, nations, and, for a moment, 
of the entire financial world. Recourse to these 
expedients had also helped to avert that complete 
collapse of international trade which the British 
foreign office had foretold on the eve of war. But 
the time had now arrived at the end of 1 914, as it 
arrives in all great financial panics, when the sense 
of relief at escaping the seemingly imescapable 
catastrophe was superseded by a sense of the 
great and possibly lasting change in the world's 
economic relations. The "emergency expedients" 
had broken the force of panic, but they could not 
restore pre-existing conditions. When they had 
accomplished their specific task, the real economic 
influences called into being by the war began to 
exert their unhindered power. 

It had, in fact, required nearly all of this five 
months' lapse of time for bewildered Europe to 
realize what this war was to be, even in its polit- 
ical and military aspects. Expectation that it 
would end with a short and triumphant German 
march on Paris, or with a crushing counterblow 
by the Allies, was no longer tenable, in or out of 
the financial markets. During this period the 
Belgian resistance had broken down. Liege and 
Brussels had fallen. The German army had 



EVENTS OF THE WAR 117 

swept almost to the gates of Paris. The French 
Government had removed to Bordeaux. The Ger- 
mans had been defeated at the Mame ; Paris had 
again become the seat of government. Retreating 
far to the northward, Germany's soldiers had be- 
gun the trench fighting on the western front, which 
was destined to create a military deadlock of 
nearly two years' duration. 

Russia had invaded Germany and been driven 
back. England had swept the seas of German 
shipping and blockaded the Teutonic ports. 
Turkey had joined the war and closed the Dar- 
danelles, German cruisers and Zeppelins had 
bombarded unprotected English coast towns, and 
the shameful story of German brutality and 
plunder in unhappy Belgium had become known 
to the civilized world. That this would be a long 
war, a destructive war, a war costly beyond the 
furthest previous flight of imagination, and a 
war in which international bitterness and hatred 
would reach unparalleled intensity, was now plain 
to the least experienced observer. The second 
economic chapter of the war was about to begin. 
It was marked by a distinct and rapid change in 
the actual position of both belligerent and neu- 
tral markets, but it was notable beyond all else 
in the completely altered relations which it in- 
troduced between Europe and the United States. 
This chapter of events began with 1915. 



Ii8 THE SECOND PERIOD 

The European moratoriums had by the end of 
1 9 14 been in large measure abandoned; the ma- 
chinery of the credit system was at work again. 
Except for Germany and Austria, whose coasts 
were blockaded by the British fleet, and Russia, 
whose ports were closed on the Baltic by Germany 
and on the Black Sea by Turkey, the larger bel- 
ligerent states had resimied activities in foreign 
trade, though on a greatly restricted scale; ex- 
port of English products during the whole of 
191 5, for instance, being cut down more than one- 
fourth from the last full year of peace. From the 
financial point of view, the alignment of the vari- 
ous fighting Powers was now highly interesting. 

The results of the crucial economic test through 
which each had passed were in many respects 
startling, and in some quite unexpected. England, 
although she had successfully averted a collapse 
of credit, had been shaken in prestige by the 
moratorium, and was about to relinquish volun- 
tarily, for the period of war, her position as the 
central market of the world. France, which a 
few years before had been lending money to Ger- 
many, to the United States, and even to England, 
fotmd herself in a seriously crippled financial 
position, in which (partly because the enemy was 
still on French soil) her government was unable 
to place long-term loans either abroad or at home. 
Germany's success in raising enormous sums 



NEW DEVELOPMENTS 119 

through domestic loans, in the face of the em- 
bargo of her international commerce and finance, 
had amazed the world. But her currency was 
depreciating; a premium was bid on gold until 
the Bimdesrath imposed prison sentences on all 
who repeated the exploit; the foreign exchanges 
were moving rapidly against her, and she had to 
contend, in her economic as well as her political 
relations, first with the gradually tightening grip 
of the blockade on her food and supplies, and next 
with the overwhelming condemnation visited on 
her conduct by the neutral world, and the firm be- 
lief of that outside world in her eventual defeat. 

These new aspects of belligerent Europe's eco- 
nomic position had much to do, as we shall pres- 
ently see, with the altered course of events finan- 
cial in the United States. Two new and very 
striking incidents of the period had immediate 
bearing on the situation in both Continents. 
One was the action of the European Powers in 
regard to their gold supply, in which some en- 
tirely new economic precedent of war time was 
established ; the other was the discovery of what 
they would have to buy from producers in neu- 
tral states. Experience in former wars had taught 
the financial world that, in a conflict of larger 
magnitude, a belligerent coimtry would rapidly 
lose its gold through export. Such a movement 
always indicated either transfer of capital from 



I20 THE SECOND PERIOD 

the uncertainties of a fighting state to the refuge 
of a neutral market, or inflation of paper currency, 
which, in the famiHar machinery of finance, 
would drive out gold, or both influences com- 
bined. Both were reasonably sure to operate in 
the existing case of Europe. 

In former wars they had operated notwith- 
standing suspension of gold payments at the 
banks and .public treasuries, such as was publicly 
announced in Germany during August, 19 14, and 
tacitly put into effect by France. Yet the gov- 
ernment, first of Germany and then of France, 
took this time the quite unprecedented step of 
calling on its citizens to surrender voluntarily, in 
exchange for paper money, the gold in their pos- 
session. It must be remembered that in previous 
great wars, payment of gold by citizens to the 
government had always ceased. It became, 
actually or prospectively, worth more than other 
forms of currency. Merchants who had to use it 
in their foreign payments paid a premiimi to get 
it. Even the public treasury, when it needed gold 
for remittances to foreign countries or for interest 
on its debt, had to bid a premium, paid in its 
own depreciated paper. The exodus of gold from 
the United States in our Civil War was so well- 
known a phenomenon that politicians who de- 
sired to perpetuate the depreciated paper currency, 
and who opposed return to specie redemption of 



EUROPE AND ITS GOLD 121 

it after the war was over, were accustomed to 
refer in their campaign speeches to the "blood- 
stained greenbacks" which had stayed with the 
armies and the people while the gold was making 
its cowardly flight to Europe. 

The natural order of events in continental Eu- 
rope of 1 9 14 would have been the same. But the 
German Government, having by law forbidden 
export of gold or the bidding of a premiimi for it, 
issued a proclamation urgently insisting on the 
exchange for imperial bank-notes, at face value, of 
all the gold held by its citizens. This proclama- 
tion rested its demand partly on grounds of pa- 
triotism, but partly also on the argument that 
gold was of no use to a private citizen and that 
paper currency was all that he had a right to ask 
for. It ended with the curious assurance that the 
imperial post-offices, at which gold would be re- 
ceived in exchange for bank-notes, woiild make no 
charge for the conversion. I have already re- 
ferred to the hoarding of gold in enormous sums 
which had occurred in continental Europe during 
the "war scare" after 191 1. Responding to this 
appeal, the gold emerged from its hiding-places. 
In the autumn months of 1914 nearly $20,000,000 
a week was thus turned over to the German 
Government. During the first seven months of 
war, no less than $250,000,000 gold was added to 
the imperial bank's reserve, and of this only $50,- 



122 THE SECOND PERIOD 

000,000 came from the government's own "war 
chest," maintained since 1871 at Spandau Castle. 

In the middle of 191 5 the French Government 
made a similar appeal to its citizens, basing its 
request for exchange of gold on the plea of pa- 
triotism, and, after a fashion characteristically 
French, bestowing on every citizen who brought 
in his gold an official certificate of service to his 
coimtry. Within seven weeks, $100,000,000 gold 
had been received by the Bank of France. It 
could have come from nowhere but the hoards of 
private citizens, and upward of $150,000,000 more 
came in before the end of 191 5. Since neither the 
French nor the German Government was paying 
out gold, the upshot of these remarkable opera- 
tions was that the gold was still being hoarded, 
but by the public treasury, not by individuals. 
What will eventually be done with these immense 
accumulations — by far the largest ever held by 
the two state banks — remains to be determined 
later. The gold might conceivably be used, at 
the end of war, to pay indemnities. It might 
serve to facilitate return to gold redemption of 
the paper currency. It might be used exclusively 
for payment of interest and principal on foreign 
indebtedness incurred during the war. The sali- 
ent fact is, that the world had witnessed an abso- 
lutely new achievement in economic history. 

The course of the British Government was dif- 



TURN IN THE SITUATION 123 

ferent. Gold payments had not been suspended 
at the Bank of England; the government's early 
proffer of authority for that step had been re- 
jected. As we have seen, the early months of 
war were marked by large gold exports from New 
York for account of London. Shipment of this 
American gold to the Bank of England's newly 
established branch in Canada, and the deposit 
with its South African branch of the $14,000,000 
gold produced on the average each month from 
the Transvaal mines, increased the total gold 
holdings of the bank from the $138,000,000 of 
August 7, 1 914, to $362,500,000 in the middle of 
November; this, like the holdings of the French 
and German banks, being much the largest gold 
reserve in the institution's history. But we have 
also seen that November, 1914, marked the turn 
in America's economic fortunes. The New York 
market had paid its maturing Habihties to Eu- 
rope, had protected its own credit, had given 
plain evidence to the outside world of its confi- 
dence in its own position. At the very moment 
when an English commission had arrived at Wash- 
ington, with the belated purpose of helping to 
remove our difficulties on the international mar- 
ket, the whole situation altered. 

Exchange on London had fallen to the normal 
parity, and our gold exports to England or Can- 
ada had ceased. In another month or two, ex- 



124 THE SECOND PERIOD 

change was moving so rapidly in this country's 
favor that the gold previously sent from New- 
York to Canada was coming back again, and be- 
fore the middle of 191 5, all of it had returned. 
During the whole of 191 5 the United States im- 
ported no less than $451,900,000 gold, or nearly 
$300,000,000 more than in any previous year. 
Of this huge sum, two-thirds came from England 
and Canada, the Bank of England's Ottawa re- 
serve giving up $218,000,000, Despite the new 
supplies received by it from the Transvaal mines, 
the bank's gold holdings fell from the $362,500,- 
000 of November, 19 14, to $251,000,000 at the 
end of the next year. We have next to ask what 
were the causes of this extraordinary reversal of 
conditions. 

Our enormous export of wheat was the first. 
That influence had not been overlooked before- 
hand; for war, which often means the blockade 
of belligerent producers, affects the wheat trade 
first among all industries. Food must be had at 
any cost, and the uncertainties of war therefore 
created abnormal demand, even in such minor 
conflicts as the Franco- Prussian War and our 
Spanish War of 1898. The Napoleonic period 
was marked by two memorable famines, in one of 
which, wheat at Liverpool reached the highest 
price ever known. Circumstances in the world's 
grain trade, when this war broke out in 1914, were 



THE AMERICAN HARVEST 125 

somewhat unusual. The United States was about 
to harvest the greatest wheat crop of its history. 
The 891,000,000-bushel yield of the season ex- 
ceeded by 127,000,000 bushels, or nearly 17 per 
cent the country's previous maximum. Before 
war began, the price of wheat was falling; the 
grain trade doubted its ability to sell, except at 
greatly reduced prices, the surplus which would be 
left after meeting the needs of home consumers. 

But this aspect of the situation soon changed in 
a very dramatic way. In face of the unprece- 
dented American harvest, the crop of 19 14 in the 
whole wheat-producing world, outside the United 
States, turned out to have decreased 367,000,000 
bushels, or II per cent, from the preceding year. 
This was only one of the offsetting considerations. 
Not only was the wheat crop of Europe, Canada, 
and Australia so much below the normal average 
as to have caused a troublesome shortage in grain- 
importing states, even without the war, but the 
area of battle at once extended over some of the 
most fertile granaries of Europe, and meantime 
Russia, one of the two largest wheat-producing 
countries of the world, was instantly cut off from 
the export market. In the twelve months end- 
ing with June, 191 5, as a result of these remark- 
able coincidences, the United States exported 180 
per cent more wheat than in the year before, the 
value of the export increasing $245,000,000. The 



126 THE SECOND PERIOD 

American harvest of 191 5 reached 1,000,000,000 
bushels. 

It was in December, 19 14, that our huge grain 
export so far counterbalanced the decreased ship- 
ments of other commodities that our total out- 
ward trade, for the first time in the war, ran be- 
yond that of the same month a year before. 
Early in 191 5, another and a yet more powerful 
influence was thrown into the scales. The dead- 
lock of the military campaign in western Europe 
had convinced the Allies that only through over- 
powering superiority in artillery could they beat 
back the German army. England and France 
set to work at once "mobilizing" their own in- 
dustrial plants for manufacture of ammunition; 
but this was not enough. Orders in prodigious 
quantity were placed with American contractors, 
by whom the machinery in manufacturing plants 
of every sort was adjusted to making shells, 
rifles, powder, and bullets. As yet it is merely a 
matter of estimate what the total of such orders 
was. Wall Street at one time figured it at $1,000,- 
000,000. On the basis of official reports, it has 
been shown that, in the twelve months after the 
shipments began, $500,000,000 of such material 
was exported from the United States, and a very 
great part of the purchase price was paid by Eu- 
rope in advance. 

Under such varying influences, the country's 



OUR WAR-TIME EXPORTS 127 

total exports rose to stupendous magnitude. This 
result was one of the unexpected economic phe- 
nomena of the war ; history gave no precedent for 
it. It is true that the United States, during the 
early years of the Napoleonic conflict, enlarged 
its foreign trade in a spectacular way. In 1801 
we exported $94,000,000 worth of goods — a very 
substantial increase from the previous decade; in 
1807 they had reached $108,000,000. But this 
older war-time increase was not at all made up 
from larger shipments of our home products to 
belligerent Europe. It arose almost exclusively 
from the fact that the activities of European 
war-ships, in capturing enemy cargoes on the 
ocean, threw over to the neutral American ship- 
masters the immensely lucrative trade of the West 
Indies. 

Eventually, the bulk of such shipments were 
consigned to American ports, whence they were 
promptly reshipped to Europe. Whereas, in 1792, 
this total of "foreign merchandise re-exported" 
from the United States was reported by our gov- 
ernment as only $2,109,000, in 1799 it had risen 
to $45,523,000, and in 1806 to $60,283,000. How 
extraordinary that achievement was, judged by 
the period itself, may best be judged by the fact 
that the total of such re-exports in 1806 was not 
duplicated until 191 5. But the main influence on 
our trade of 191 5 was altogether different. Our 



128 THE SECOND PERIOD 

merchandise shipments of that year to such out- 
lying continents as Asia, Africa, and AustraHa 
did indeed run $42,000,000 beyond the largest 
previous yearly total, while the exports to South 
America rose $54,000,000 above 19 14, and ex- 
ceeded all other years but one. This was itself a 
consequence of the war and of the war's paralysis 
of Europe's industrial activities. But how rela- 
tively small a part this trade with other neutral 
countries played in the total increase of our 
exports on this occasion, is clearly shown by the 
fact that otir outward trade in merchandise dur- 
ing 1915 ran $1,433,000,000 beyond that of the 
preceding year and $1,063,000,000 beyond the 
largest previous yearly total in our history. 

Two- thirds of the increase over 19 14 was ac- 
counted for by consignments to England and 
France, and it was a peculiarly interesting fact 
(not without diplomatic significance) that whereas 
our direct exports to Germany and Austria de- 
creased $158,000,000 — in fact, disappeared almost 
entirely — nevertheless, our exports to Holland, 
Denmark, Norway, and Sweden increased $154,- 
800,000 over 1 914, and exceeded even the last full 
year of peace by $182,800,000. Prior to 1915 the 
highest figure ever reached by our total surplus of 
merchandise exports over imports was the $691,- 
000,000 of 1 9 13. The surplus for the calendar 
year 191 5 was $1,768,000,000. In the twelve 



NEW YORK IN LONDON'S PLACE 129 

months ending with June, 191 6, it was $2,136,- 
000,000. 

I have already quoted the comment, made at 
London in the autumn of 1914, that New York 
had "missed the chance of a century" to take 
London's place as the financial centre of the 
world. Only two or three months later, Lombard 
Street itself was admitting that, for the period 
of war at any rate, New York had already gained 
that position. It was early in January, 191 5, 
when the British Government officially announced 
that English capital must be reserved for the war 
financing of Great Britain and her allies, and that 
no new loans of outside communities or govern- 
ments were thereafter to be floated in London 
without the government's consent. From this 
plain declaration of policy it was instantly in- 
ferred, first, that London had ceased for the 
period of war to be the active money centre of 
the world; second, that no other market could 
tmdertake that work except New York; and, 
third, that the financial shoulders of the United 
States were now broad enough to bear the biu:- 
den. 

The task, thus transferred to the American 
market, of providing money for the urgent finan- 
cial necessities of outside communities, was per- 
formed cautiously. It was a new experiment for 
us, and began under unusual conditions. But our 



I30 THE SECOND PERIOD 

bankers underwrote loans in the hundreds of 
millions to the South American republics, to 
Canada, to Switzerland, and the Scandinavian 
states, and in return New York undoubtedly be- 
came for the time the money market of the world. 
The "central money market" must be that 
market to which the rest of the world applies for 
credit. It must discount, for the merchant con- 
ducting foreign trade in one community, and for 
the period of the business season, drafts sent 
forward by merchants in another community 
against goods sold to him, and must therefore 
provide the working capital for international 
commerce. It could not have been expected that 
the New York banks would be able on the spot 
to do this on the scale of London's activities be- 
fore the war. But international trade had been 
greatly reduced in voliune by the war unsettle- 
ment. Our own home demands on credit were 
relatively light. London, though it had ceased 
to put its money into the securities of foreign 
markets, continued to do a discount business for 
those markets, and New York therefore made 
its entry into the field without an undue strain. 
It not only subscribed in large amounts for new 
securities of Canada and the South American 
communities, but entered directly on London's 
business of providing the capital for international 
trade. At the beginning of 191 5 discount of 



FINANCING FOREIGN TRADE 131 

"acceptances," based on a foreign merchant's 
export of goods, was practically unknown in New 
York banking; at the end of the year it was 
officially stated that $100,000,000 of such bills of 
exchange were in the hands of American banks. 

Now, a market which performs these services 
for foreign communities, like a bank which per- 
forms them for its own town or city, pays out its 
capital in loans; but in return it gets back cap- 
ital in deposits, which is the real source of profit; 
and this was necessarily the experience of the new 
money centre. Merchants in other neutral mar- 
kets transferred from London to New York the 
balances on which they were accustomed to draw 
in connection with their foreign trade. American 
banks and merchants to a very great extent re- 
called from London the balances previously 
carried there for the same purpose. This process 
had an important double influence on the eco- 
nomic phenomena of the year. 

It greatly increased the aggregate of payments 
which England had to make to the United States. 
It also added a huge amount to the available 
capital on the American markets. The first in- 
fluence operated on the rate of exchange between 
New York and London, with results which we 
shall presently have to examine. The second went 
far toward explaining the extraordinary achieve- 
ment of the American market during 191 5, in 



132 THE SECOND PERIOD 

which year the United States not only repurchased 
from Europe American securities commonly es- 
timated at $1,000,000,000, but, in addition, pur- 
chased more than $1,000,000,000 of new securi- 
ties issued by belligerent and neutral European 
countries, by Canada, and by the South Amer- 
ican republics. This was an innovation. Amer- 
ican investors had never been in the habit of 
lending money largely to the outside world; 
New York's investment in England's war loans 
during 1900 and 1901, and in Japan's war loans 
during 1904 and 1905, was of a temporary nature 
and on a relatively small scale — only a little more 
than $300,000,000 in all. It was quite inevitable 
that this tangible display of economic resoiu'ces, 
in the face of the European War, should have 
encouraged the movement of capital from outside 
markets to the United States. 

The financial community itself was curiously 
slow to recognize what all this meant to the ques- 
tion of America's own prosperity. When the 
European War began, the question asked with 
special urgency in American business circles was 
how the United States could be safeguarded from 
a period of financial adversity. Eight or ten 
months later, the prospect of immediate financial 
reaction was conceded to have disappeared, and 
vague talk began of the business revival which 
this powerful neutral country might expect after 



WAR-TIME PROSPERITY 133 

the war. Even when, in the autumn of 191 5, the 
question was put to one of the most eminent of 
our practical manufacturers, "Is the United 
States headed for unprecedented prosperity ? " and 
the reply was, "It is enjoying that prosperity 
now," the diagnosis was widely disputed, in Wall 
Street itself. Prosperity, however, is sometimes a 
matter of definition. What one merchant, banker, 
or speculator would describe by that title, another 
would dismiss as not measining up to it at all. 
If by prosperity we mean such a period as 1901 
or 1906, when every one seemed to be making 
and spending money lavishly, when the word 
passed current that "nothing can stop the good 
times," and when the spirit of hopefulness over 
any and every kind of business imdertaking was 
apparently under no restraint — then the con- 
ditions existing in 19 15 would certainly not meet 
the test. But there is prosperity and prosperity; 
and it soon became possible to appeal to well- 
known criteria which had long been accepted, 
in financial and industrial circles, as indicating 
whether real prosperity does or does not exist. 

The London market, as even the English his- 
tories show, has traditionally made great account 
of the movement of the foreign exchanges, for or 
against the coimtry whose prosperity is in ques- 
tion. If this were to be the test, the prosperity 
of the United States in 1915 would have stood 



134 THE SECOND PERIOD 

unchallenged; it is doubtful if ever before in eco- 
nomic history had the rates of exchange on all 
the rest of the world moved so powerfully in one 
market's favor as they moved in that year in 
favor of New York. The economic derangement 
of Europe by the war, however, made this rather 
more a test of relative than of actual conditions. 
The stock market, if its action is sufficiently 
continuous and emphatic, is another quarter 
where at least the premonition of prosperity is 
expected. It is "the pulse," Macaulay said, 
"which during four generations has continued to 
indicate the variations of the body politic." It 
performs this office, chiefly because a prolonged 
and general rise in prices should reflect expecta- 
tion, by the best-informed people in the country, 
of increasing business profits for the transportation 
and manufactiiring properties whose shares are 
sold on the stock exchange. For obvious reasons, 
this is a test which must be cautiously applied. 
Currency inflation will stimulate advancing prices, 
measured in paper money, when gold values may 
even be declining. This made the stock exchange 
almost a useless criterion in our Civil War. Ex- 
perienced people would not take one of those 
outbursts of wild speculative mania, which at in- 
tervals derange the whole financial organism, as 
prophetic of sound prosperity. On the stock mar- 
kets of 191 5, something like that was witnessed 



TEST OF THE MARKETS 135 

in the extravagant rise of shares of companies 
manufacturing war supplies. But that movement 
reached and passed its climax; prices of such 
stocks, after rising 25 to 100 points, lost half of 
the preceding rise, or more, in a violent collapse. 
Yet at the same time a long series of railway- 
stocks, in which prices had risen fully 20 per cent 
since the early months of 191 5, held stubbornly 
to their higher values. 

' Among these were shares of the most conserva- 
tive American railway companies, whose fluctua- 
tion on the market measures the attitude of serious 
investors. What was not least remarkable, the 
home demand which served to bid up prices for 
these stocks was so obstinate as almost wholly to 
offset the influence of Europe's sales to us of its 
own holdings of these shares. Europe had been 
selling back our best railway and industrial bonds 
also, and it had become a matter of common pre- 
diction that a violent fall of prices for American 
bonds must be inevitable as a result of the high 
European bid for capital. Yet what happened in 
November was the largest dealing in bonds that 
the stock exchange had witnessed in half a dozen 
years, and an advance in prices so rapid as to 
bring them nearly or quite up to the earlier high 
level of 1914. 

These indications showed chiefly what was 
expected. There were other indications of what 



136 THE SECOND PERIOD 

must actually have occurred. One very familiar 
test of active and prosperous trade, financial 
observers find in what are known as the country's 
clearing-house exchanges. Every bank, receiving 
as deposit from a client the checks drawn in his 
favor on other institutions, sends those checks to 
its district clearing-house, whence they are for- 
warded for collection to the banks on which their 
maker drew them. From this process it results 
that the total money value of the checks thus 
exchanged, in a given period at all American 
clearing-houses, indicates accurately the total 
payments made in connection with the business 
activities of the period. The actual figures are 
carefully tabulated. Until the autumn of 191 5, 
the largest weekly total of such bank exchanges 
in this country was the huge sum of $4,868,000,- 
000 in the first week of 19 10. But in the third 
week of November no less than $4,903,000,000 
checks changed hands — an increase of 74 per cent 
over the same week in 19 14, of 42 per cent over 
1 913, and of 37 per cent over even the very active 
business season of 191 2. No month in the coun- 
try's history had ever approached, in the total 
magnitude of checks drawn for business purposes, 
the closing month of 191 5. During the first half 
of 1 91 6, the total rose nearly 40 per cent above 
the highest record for any previous correspond- 
ing period. 



IRON OUTPUT IN THE WAR 137 

The monthly statements of the country's iron 
production are an even more tangible sign of in- 
dustrial activity. When business in general is 
reviving and the outlook for active and profitable 
general trade is bright, orders at once increase 
with the iron-mills. The reason is, that every 
other industry has to increase its steel and iron 
equipment in preparing for an active season. The 
farmer needs new agricultural machinery. Mer- 
chants and miscellaneous manufacturers wish to 
enlarge their working establishments. The rail- 
ways must have more cars and locomotives and 
rails; the steel- mills themselves will be adding to 
their own productive facilities. Active demand 
for all these prospective purposes will be seen in 
the steel and iron trade's order-books, even before 
the signs of visible activity have appeared in the 
industries which want the new material. These 
are the reasons why iron is known traditionally 
as the "barometer of trade," and why a rise in 
steel and iron prices, and steady increase in steel 
and iron production, ordinarily mean general 
trade revival. 

At the end of 191 2, just before the industrial 
revival stimulated by what were then our record- 
breaking crops had been checked by the danger- 
ous turn taken in the Balkan War, all precedent 
was surpassed in American iron production. The 
average daily output of 92,600 tons, reached dur- 



138 THE SECOND PERIOD 

ing February, 1913, remained the maximum of 
the country's history until September of 191 5. 
That month ran sHghtly beyond the 19 13 figure; 
the next month's average daily output crossed 
for the first time the 100,000-ton mark, and the 
total monthly output went in October — again for 
the first time in the trade's records — ^beyond 
3,000,000 tons. The monthly average for the 
year of largest production in our previous history 
had been barely 2,500,000. "Never before," the 
Iron Age, a highly conservative organ of the in- 
dustry, remarked of these October figiu-es, "has 
the steel trade seen demand so overwhelming, 
and at the same time its output expanding on 
such a scale, under steadily rising prices." Yet 
only six months later, the output was ten per 
cent greater. 

One obvious criticism on the testing of pros- 
perity by the steel and iron situation alone was 
that orders for war munitions, placed in this 
country on so great a scale, had been an immense 
stimulus to that industry, yet were not in the 
nature of a permanent influence. There was 
force in this objection; it was largely offset, how- 
ever, by the fact that these very requisitions for 
use in war supplies had started up inquiry for 
other purposes from home consumers. It was 
their demands which brought the steel trade, in 
the early months of 191 6, to the actual limit of 



INCREASED RAILWAY EARNINGS 139 

its producing capacity. There was still another 
test of active trade which always appeals to the 
financial markets. By the middle of October the 
railway tracks and terminals, East and West, be- 
gan to be blocked with freight. No such visible 
overflowing of transportation facilities by offer- 
ings of traffic had been witnessed in this country 
since 1906, and it is doubtful if the strain had been 
equally severe since the sudden and rapid trade 
revival of 1899 caught the railways utterly un- 
prepared. 

As early as September, 1915, the Pennsylvania 
Railroad reported the largest total earnings, and 
the largest excess of earnings over working ex- 
penses, of any month in its history. If it be said 
that this, too, may have largely meant the mu- 
nitions trade (the Pennsylvania runs through 
Pittsburgh), there were other railways to compare 
with. When their October statements were given 
out by railways in the Middle West, in the North- 
west, on the transcontinental route, all were sub- 
stantially up to the highest previous record for the 
month, and a considerable number, like the Penn- 
sylvania in the month before, svupassed all previ- 
ous monthly figures. These at least were no 
matter of war materials. The general manager 
of one of the largest railways running between 
Chicago and New York remarked at the end of 
November : ' ' People who think the war munitions 



I40 THE SECOND PERIOD 

are blocking the movement of freight should spend 
a few minutes in our freight-yards. You will find 
them blocked with cars loaded with meat, auto- 
mobiles, locomotive and freight-car parts, and a 
thousand commodities not used in war, and you 
will find the freight consigned not only to Europe, 
but to South America, India, and all the rest of 
the world." 

More than this: in the last week of October, 
deliveries of grain by Western farmers to the 
railways, at what the grain trade calls the "pri- 
mary receiving points," not only rose, 10,000,000 
bushels above the same week in 1914, but exceeded 
by not quite 6,000,000 bushels the 30,990,000 
bushels delivered in the third week of September, 
1 91 2 — which, imtil the auttmm of 1915, were the 
high mark of the grain trade. This itself reflected 
yet another traditional weather-sign of reviving 
industry: the fact that, by the government's 
final autimin estimate, the yield of the country's 
five great grain crops was 5,892,601,000 bushels, 
as against 4,942,613,000 actually harvested in 
1914, and 5,532,838,000 in the most abundant 
previous season — that of 1912. 

What all this signified should have been plain 
enough. The tests thus applied covered prac- 
tically every measure of business prosperity, and 
each gave emphatic witness to the existence of 
such prosperity. There still remained, and will 



"WAR BOOMS" 141 

doubtless continue to remain, a body of opinion 
which, conceding all these evidences, held the 
position that prosperity was ill-distributed among 
the different industries and the different sections 
of the country; but, more than this, that what- 
ever prosperity existed was precarious, temporary, 
based on wholly abnormal influences. In other 
words, the conditions thus suddenly created dur- 
ing 191 5, and continuing throughout the next year, 
merely represented one of those "war booms" 
which history records at the crisis of all great 
conflicts, even in the belligerent commiuiities — • 
prosperity of the kind which induced the furious 
activity of 1809 in England and 1864 in the 
United States, but which ended in each case in 
the prolonged reaction of a few years later. 

Neither of these contentions can be lightly 
dismissed. Yet it is pertinent to ask whether, 
even so, they affected the question whether Amer- 
ican prosperity was actually imder way. There 
has never been an American trade revival of the 
past in which some industries and some com- 
munities, for reasons peculiar to themselves, did 
not hang back behind the others. There has 
never been a period of American prosperity — 
even in the so-called "boom years" of 1872 or 
1880 or 1 90 1 or 1906 — which did not have some- 
thing of the temporary and the precarious about 
it. 



142 THE SECOND PERIOD 

If, indeed, the American industrial revival of 
1 91 5 had as its sole basis the "war orders" from 
Europe, and especially if it was stimulated by an 
inflated paper currency at home, there would be 
something more to say. But neither of these con- 
ditions actually existed. The fundamental phe- 
nomena were the soundness of economic conditions 
in the country on which these imexpected wind- 
falls descended, and the rapidity with which the 
movement of expansion extended to industries 
dependent on domestic orders and on the needs of 
peaceful trade. It is even possible to construct 
a theory of the existing situation as a trade re- 
vival accidentally and artificially postponed. In 
America the tradition of the "cycle of prosper- 
ity" is invariable, to the effect that after a great 
financial panic five or six years (not more) are 
needed for liquidation and recuperation; after 
which the great forward movement begins again. 
It began in 1879, following 1873, and in 1898, 
following 1893, and many signs indicated resump- 
tion in 191 2 of such a movement, when the re- 
action of 1907 had spent its force. In what way 
this return to American prosperity was arrested 
by the political apprehensions and disturbances in 
Europe, every one knows. 

Sometimes compulsory postponement of so 
normal a movement of recovery means that the 
forces making for legitimate expansion at the 



POSITION OF AMERICA 143 

earlier date will have grown stronger for being 
held in check. At all events, it is under precisely 
such circumstances that the United States will 
confront the changed world, with its new financial 
and industrial conditions, which is to emerge from 
this war whenever peace actually returns. Noth- 
ing will then be quite as it has been in the past; 
all economic relationships between the different 
nations will be altered. But the position occupied 
by the United States at the beginning of the new 
economic era will be something very striking, very 
unusual, and economically very poverful. 



CHAPTER VIII 

CURRENCY INFLATION 

THAT inflation of the paper currencies of the 
beUigerent states would be an inevitable in- 
cident of such a war as this, was the un- 
questionable teaching of history. Depreciation 
in such currencies was singularly absent from 
financial calculations at the outbreak of the war; 
this notwithstanding the very general prediction 
of economists, in previous discussion of the prob- 
able phenomena of a general European conflict, 
that gold payments could not be maintained 
tmder such conditions. Yet experience had taught 
that every prolonged and costly war of the pre- 
ceding century had been characterized by issue 
of paper money, in such quantity as to exert far- 
reaching economic influence on the markets. In 
the course of our own four-year Civil War par- 
ticularly, the United States Government issued 
$450,000,000 of paper money; our actual paper 
circulation increasing, between 1861 and 1865, no 
less than 270 per cent. Government calculations 
of the average prices of commodities in this coun- 

144 



EUROPE'S PAPER MONEY 145 

try showed an advance of 116 per cent during the 
same period, and that movement was accom- 
panied by a violent rise on the stock exchanges, 
and by what seemed to be a notable forward 
movement of prosperity. 

There were secondary causes for the war-time 
rise of prices in the sixties, and for the resultant 
speculative expansion; among them the War 
Department's purchases, the blockade of the 
South, and the rising price of a labor market de- 
pleted by enlistments in the army. But no in- 
telligent reader of history doubts that the pri- 
mary cause was the paper-money inflation. Since 
the after-results of that inflation were disastrous, 
it is not unreasonable to ask whether our financial 
and industrial revival of 191 5 may not have been 
based on similar causes, and may not be destined 
to a similar unhappy end. 

Taking the world at large, there is no doubt 
whatever as to the fact of paper-money inflation 
during this present war. Between July, 1914, 
and the middle of 191 6 Germany's paper cur- 
rency increased from $473,000,000 to $1,740,000,- 
000, or something like 320 per cent. France 
brought its bank-note issues from $1,336,000,000 
to $3,100,000,000, an expansion of 131 per cent. 
In Russia, the Imperial Bank's note issues alone, 
which were $930,000,000 at the outbreak of the 
war, reached $2,650,000,000 at the end of 191 5 and 



146 CURRENCY INFLATION 

$3,100,000,000 three months later. This was an 
increase of 336 per cent, and there was probably 
other ciirrency put out. Austria has not ventured 
to publish the figures of her war-time paper- 
money issues, but they were certainly very large. 
The Bank of England's note circulation had 
increased by the middle of 1916, as compared with 
July, 1914, only from $148,500,000 to $176,500,- 
000, or less than 20 per cent. But the special 
currency authorized by the British Government 
when the war began — put out by the treasury for 
account of the English joint-stock banks, and se- 
cured by government bonds, commercial paper, 
and, during 1915 and 1916, by $142,500,000 in 
gold — ^had risen by the middle of 191 6 to no less 
than $586,000,000. Including this amount, the 
increase in England's paper issues, since the war 
began, was 515 per cent. It is true that these 
English "currency notes," being secured in part 
with gold, obtain a character which the $300,- 
000,000 or more of " Darlehnskassenscheine " in 
Germany (against which no gold at all is held) 
do not enjoy. It should also not be overlooked 
that while the Continent's currency expansion of 
war time came on top of bank-note circulations 
only partly protected with gold, the Bank of Eng- 
land's own note issues, now as heretofore, are se- 
cured in gold up to their full face value. Never- 
theless, we are primarily investigating inflation of 



INFLUENCE OF WAR 147 

European currencies, and the fact of immense ex- 
pansion appears in all of them. 

There are three main reasons why every pro- 
longed war of modem history has been attended 
by this inflation of paper currencies. One is, 
that the experience of the race has taught people 
to hoard gold and silver when their country 
plunges suddenly into the uncertainties of war. 
That action makes it necessary to provide a sub- 
stitute for coin in hand-to-hand payments. An- 
other is that gold, the international currency, is 
apt to be sent by its owners, for safe-keeping or 
as a means of transferring capital, from the mar- 
kets of a belligerent state to those of a neutral 
country — which may similarly create a void in 
the fighting country's circulating medium. The 
third reason lies in the fact to which I have re- 
ferred already; that paper currency, created by a 
government, may be used to meet at least a part 
of that government's immensely increased ex- 
penditure during war. 

All three of these influences had some hand in 
the war-time inflation of Europe's paper curren- 
cies. But almost all of the new currency issued 
by the belligerent states has in this one respect 
differed radically from that of former war-inflation 
periods — it was not, like our greenbacks of the 
Civil War and the assignats of the French Rev- 
olution, government fiat money, put out directly 



148 CURRENCY INFLATION 

by the national treasury to pay the expenses of 
government. Most of the new European paper 
money of 19 14 and 191 5 was issued by the central 
bank of each respective belligerent, and had to be 
offset, on the balance-sheet of the issuing institu- 
tion, by a corresponding sum in commercial loans, 
or public and private securities, or actual gold 
and silver. 

But, on the other hand, the bank could issue 
its notes to the government, taking new govern- 
ment bonds as security; and since single war 
loans of the belligerent states have been made in 
sums as large as $3,000,000,000, it was possible 
that the new currency should, by this process, 
pass directly into the government's hands, and 
be used for meeting current public expenses — 
just as an old-time "fiat-money issue" would be 
used. With the Bank of France, for instance, the 
$1,525,000,000 increase in its note circulation, be- 
tween July, 1 914, and the maximum figure of 
191 5, was offset on the other side of the account by 
$1,480,000,000 under the entry, "Advances to 
the State for the War." 

As to precisely what has been the effect on 
Europe itself, of this enormous currency inflation, 
it is still early to draw conclusions. On the 
Continent, gold redemption of the paper cur- 
rency, which was in force in all the important 
states before the war, was formally or tacitly 



MEASURING DEPRECIATION 149 

abandoned, as soon as the war began. An open 
premium on gold was not, however, paid in 191 5 
or 1 91 6 on any European market; that evidence 
of ciu-rency depreciation was averted in Germany 
by penal statute, and in France, apparently, by 
common consent. But this still left the rate 
of exchange on the markets of such countries, 
ciirrent in neutral cities, to measure actual de- 
preciation. The rate of New York exchange on 
Paris or Berlin, for instance, merely means what 
American bankers will give in American money 
to a merchant for his claim on a solvent French 
or German debtor, payable in France or Germany 
in the currency of that coiintry. 

Since the bankers, under existing conditions, paid 
gold or its equivalent for the draft, while know- 
ing that it would not be redeemed in gold in the 
market on which it was drawn, they could scarcely 
be expected to pay as much for it as they paid 
in days when it commanded gold. There have 
been other causes, presently to be examined, for 
the depreciation of exchange rates on belligerent 
Europe at New York. But this cause was so 
entirely obvious that depreciation in continental 
exchange would unquestionably have resulted 
from it, even if the "merchandise trade balance" 
had remained as it was before the war. The fact, 
then, that whereas a franc is worth intrinsically 
19.3 cents in American money, the New York 



I50 CURRENCY INFLATION 

dealer in exchange paid only 15.7 for it early in 
1 91 6, and that whereas a German mark, on the 
specie basis, is valued at 23.8 cents, it brought 
less than 18 cents, was in very large measure the 
reflection of a neutral market's effort to measure 
the difference between gold values and the value 
of a depreciated currency. 

But the inflation process has not produced on 
Eiu-ope's markets the effects which followed it in 
this country after 1861. It is true that English 
prices of commodities have risen violently — the 
London Economist'' s monthly "index number" of 
average prices had reached 4,319 at the end of 
May, 1 91 6, as against 3,250 in the middle of 
191 5, and 2,565 when the war began. For this, 
however, as for the similar rise on the European 
Continent and the striking though less violent 
advance in the United States, the prodigious de- 
mand for all kinds of war material, the blockade 
of producing countries, and the abnormally high 
ocean freight rates are sufficient explanation. But 
there was no excited "boom" in European busi- 
ness, except for the war contractors and the lucky 
owners of ocean steamers; no enthusiastic specu- 
lation for the rise on the stock exchanges. That 
was, perhaps, because the artificial stimulus of in- 
flation had been only sufficient to counterbalance 
the crushing financial burdens of the war, avert 
a general collapse of enterprise and credit, and 



CASE OF THE UNITED STATES 151 

maintain some sort of equilibrium on the mar- 
kets. 

This very fact, however, brings up the question 
whether the markets of the United States, where 
the burden of war did not exist, might not have 
owed their condition of aggressive prosperity to 
inflation. It is true that the fact of a premium, 
not a discount, on American currency in the 
terms of foreign money, might be taken as prima- 
facie evidence that our own currency was in a 
normal condition, and it is certain that the 
American paper currency continued to be re- 
deemed in gold. Nevertheless, it was inevitable, 
when all the original predictions as to the effect 
of the European War on American finance had 
been upset — when actual results had turned out 
precisely the contrary of what the most sagacious 
home and foreign opinion had foreshadowed — ■ 
that some people should presently begin to doubt 
the reality of the achievement. This country 
had habitually looked to Europe for the loan of 
money to meet the expenses of harvesting our 
crops and sending them to market; the loans, 
very large in amount, being repaid from the sub- 
sequent export of our produce. The war and 
the war loans put an end to such assistance. 
London no longer had anything to spare for loans 
to America. Severe stringency in New York's 
autumn money market was, therefore, not il- 



152 CURRENCY INFLATION 

logically predicted. Yet the largest grain har- 
vest in our history was financed from home re- 
sources during 1 91 5, with the American money 
market unruffled and rates almost the lowest on 
record. 

European investors held in July, 19 14, as they 
had held during many decades, three to four 
thousand million dollars of American securities. 
In the half-dozen preceding years we had man- 
aged to provide for our own industrial necessities 
only by selling several hundred millions per an- 
num of newly issued stocks and bonds to Europe. 
Europe, however, was now not only unable to 
continue such purchases, but her investors were 
certain to sell back to us in enormous quantity 
what they had already, in order to raise money 
for the $10,000,000,000 or more of war loans is- 
sued annually by the belligerent governments. 

It has been calculated by the most careful 
statisticians that at least $1,000,000,000 of Amer- 
ican securities were resold by Europe to New 
York between the reopening of our stock exchange 
in December, 19 14, and the end of 191 5. Yet 
not only did the American market take them, but 
it loaned, on its own accoimt, a sum only slightly 
less to foreign coimtries which had always here- 
tofore sold their new securities in France and 
England; and, in the face of this double burden, 
prices on our stock and bond markets actually 



AMERICAN OPINION 153 

rose beyond the level which prevailed before the 
war. 

It was undoubtedly our enormous export trade, 
first in grain and then in war munitions, the re- 
sultant increased command over European cap- 
ital, and the great amounts of capital which other 
neutral markets transferred from London to New 
York, which primarily explained the ability of 
the United States to perform this bewildering 
achievement. The unprecedentedly large import 
of gold from Europe to the United States had a 
hand in the result; it provided a basis for legiti- 
mate expansion of bank loans, whereby these large 
home operations could be easily financed. But 
the transactions themselves so completely over- 
topped anything in our previous financial history, 
and were conducted in such sudden sequence to 
a period of seeming weakness and reaction, that 
these explanations did not appear sufficient. 

It is not therefore to be wondered at that 
cautious people should have begim to ask if there 
was not something imreal, something fictitious, 
and therefore something precarious and tempo- 
rary, in this display of imheard-of prosperity. A 
well-known financier, one of the members of our 
national banking commission, in 191 5 described 
the attitude of American financiers as embodied 
in "two schools of thought, one looking into the 
future with unbounded confidence, and the other 



154 CURRENCY INFLATION 

anticipating drastic reaction and collapse." More 
specifically, the question began to be put, whether 
the United States, along with the rest of the 
world, might not have entered an era of currency 
inflation. Experience had taught that inflated 
paper money is the best-known necromancy for 
creating illogical and impossible conditions in the 
way of national prosperity — though with after- 
results which justify all the warnings of the scep- 
tics. 

One admitted fact might have been deemed to 
indicate the existence of that influence; the issue 
by our banks tinder government supervision, in the 
first three months after July, 1914, of $380,000,- 
000 in "emergency currency." There was yet 
another possible influence toward such artificial 
stimulus. Under our new banking system, put 
into operation four months after the war broke 
out, the Federal Reserve Banks of the twelve 
designated districts were empowered to issue cir- 
ciilating notes on certain prescribed collateral, 
provided they kept on hand a 40 per cent reserve 
in gold. The gold in the vaults of these institu- 
tions at the end of 19 14 bore that percentage to 
$625,000,000; at the end of 1915 they held in gold 
40 per cent of $896,000,000. In theory at any 
rate, issue of that much in new paper currency was 
possible. Here was apparently the machinery for 
such expansion of the American paper currency as 



OUR OWN PAPER MONEY 155 

would cut a respectable figure, even as compared 
with Europe. Was the Federal Reserve currency, 
then, a governing influence -in the unexpected 
chapter of prosperity which began in the middle 
of 1915, or was it not ? 

The answer is not difficult, and it is quite the 
reverse of what a good many people, even those 
of practical experience, seem to think. That the 
successful establishment of the new banking sys- 
tem was an important factor in promoting finan- 
cial confidence, and thus in clearing the ground 
for last year's American revival, there can be 
little doubt. Knowledge that its facilities were 
such as to meet, effectively and instantly, the 
necessities either of a "financial boom" or a 
"financial panic," removed much of the pre-exist- 
ing apprehension. But, contrary to very general 
supposition, those facilities remained to all in- 
tents unused during the great revival of American 
prosperity in 191 5. Therefore they cannot have 
been a factor of "inflation." The $380,000,000 
emergency currency, issued at the beginning of 
the war, had all been retired and cancelled before 
the end of June, 191 5. During that cancellation 
process, the Federal Reserve Banks were begin- 
ning to issue notes, and a substantial amount of 
them is now outstanding. Yet our total bank 
ciurency, old and new, which aggregated $1,121,- 
000,000 on November i, 1914 — just before the 



156 CURRENCY INFLATION 

new banking system was introduced — stood only 
at $985,400,000 on January i of 1916. It had 
been reduced to $929,300,000 by the middle of 
1916. 

In other words, the country's paper currency 
decreased, not increased, during the war-time re- 
vival in American finance. The point is occasion- 
ally made that, whatever may have happened 
since November, 19 14, the sum total of bank-note 
currency outstanding in the middle of 1916 was, 
nevertheless, $186,000,000 greater than at the 
outbreak of the war in August, 19 14. This is 
quite true, and $176,000,000 of that increase con- 
sisted of the new Federal Reserve notes. But in 
that direction also, some very significant facts are 
commonly overlooked. 

Under the law, a reserve bank is allowed to 
issue notes, either secured with commercial paper 
pledged by individual banks in the district, or 
secured, dollar for dollar, with gold coin. In 
the first case, the notes become the elastic credit 
currency contemplated by the Federal Reserve 
Act. In the second case, they are, to all intents 
and purposes, on the footing of the familiar gold 
certificates, issued by the treasury against an 
equivalent deposit of gold in the government 
vaults at Washington. Now, when the $176,000,- 
000 Federal Reserve notes, as of July i, 19 16, 
are analyzed, the remarkable fact appears that 



THE FEDERAL RESERVE NOTES 157 

only $10,200,000 of them were the elastic currency 
secured by commercial paper, whereas $165,800,- 
000 were the circulating equivalent of actual gold. 
Six months later, the amount of such notes out- 
standing, based on merchants' credits, was even 
less. 

As to why the banks should have preferred to 
issue notes through pledging gold against them, 
dollar for dollar, instead of securing them with 
40 per cent gold and the balance in commercial 
paper, the answer is simple. Because of its 
enormous exports to belligerent Europe, and of 
its position as a secure neutral custodian of trea- 
sure, the United States imported during 19 15 no 
less than $451,900,000 of foreign gold, or nearly 
$300,000,000 beyond any previous year; and, in 
addition, it produced from its own gold-mines 
nearly $100,000,000 more. The banks had actu- 
ally more gold in their vaults at the end of 191 5 
than they had need to use as a basis for their 
loans to American finance and industry. There- 
fore they chose, for the convenience of their cus- 
tomers, to put a considerable part of it into general 
hand-to-hand circulation in the form of notes. 

The total stock of money in the United States 
increased $429,000,000 during 1915. But the in- 
crease in gold alone, as I have shown, was a very 
much larger figure. Precisely the same was true 
of 1 9 16. The paper currency had actually de- 



158 CURRENCY INFLATION 

creased. If we were living under "currency infla- 
tion," it must have been inflation in the form of 
gold. But an increase in the proportion of gold 
to the total currency of a country is commonly 
accepted as evidence of financial soundness. 
These very significant statistics prove that Amer- 
ican finance was not under the influence of such 
inflated paper currency as existed in belligerent 
Europe. They prove that, in so far as changes 
in this country's money supply were a factor in 
the industrial and financial movement, it was the 
increase in our stock of gold which did the work. 
This, however, does not put an end to discus- 
sion about the future. In the first place, the very 
fact that the new banking system's large poten- 
tial facilities for increasing currency and credits 
had not yet been invoked is proof that the 
possibility of using them, and conceivably of 
misusing them, remained. From this we are pri- 
marily protected, as the conservative central 
banks of Europe have always been, by the large 
experience and the sober conception of their 
duties on the part of the men who direct the 
Federal Reserve, and by the very great restrictive 
power over the system's credit and currency facil- 
ities which the law has conferred upon them. 
But in the second place, quite aside from the 
question of actual expansion of paper-money is- 
sues, there will remain, until the period of post- 



OUR GOLD SUPPLY AFTER WAR 159 

bellum readjustment is well under way, the un- 
certainty as to the permanency of our present 
gold reserve. In so far as these huge additions 
to our stock of gold, like the international capital 
which they represent, have come to this country 
for safe-keeping in war time, it cannot be certain 
how much of it will be retained when the war is 
over and when Europe will do its best to draw 
gold from the United States. 

Theoretically, it could accomplish that purpose 
by such enormous export of merchandise to Amer- 
ica as should turn the foreign exchanges against 
us. It could do it through similarly large sales of 
its own securities to New York. Or it could get 
the gold by maintaining such high money rates 
on European markets, in the face of easy money 
here, that large amounts of capital, now put out 
on loan in this country, would be withdrawn and 
offered at the higher rates in Europe. 

These are all possibilities; it is therefore a 
theoretical possibility that so much gold would 
be drawn away as to deplete our own bank re- 
serves and disturb our markets seriously. It is ex- 
tremely doubtful, however, in my judgment, 
whether these results, in such shape as to create 
actual embarrassment, can be described as prob- 
abilities. Europe cannot reverse our balance of 
trade in merchandise, unless its own need of 
American products decreases very greatly, or 



i6o CURRENCY INFLATION 

unless wages of European labor can be put down 
again so as to undersell our manufacturers. Eu- 
rope will undoubtedly succeed in selling large 
amounts of securities in America after peace; but 
America is not compelled to buy any more of 
them than is prudent. 

As for the question of a high bid through Euro- 
pean money rates, it is at least an open question 
whether money will be high or low in Europe 
when the war is over. Hard times and prolonged 
industrial depression in the present belligerent 
communities will follow this war, as they followed 
the Napoleonic wars, and industrial depression 
does not favor high money rates. Furthermore, 
even if London and Paris and Berlin were to bid 
for our gold in this manner, it would remain to 
see what response our own money markets would 
make, under the influence of the Federal Reserve 
Banks, which have large powers, through their 
control over our own money markets, to regulate 
and restrain the movement of our gold. That will 
possibly be the first occasion when the power of 
this novel institution in our financial history will 
be fully tested. 

The special problems which inflated and depreci- 
ated currencies will create for Europe, when the 
war is over, are far more formidable. One of the 
highest French economic authorities predicted, 
during 1 91 5, that ten years would probably be 



PAPER MONEY IN SMALL SUMS i6i 

needed to bring the currency of Prance back to a 
normal basis. Germany will be confronted, not 
only with her hugely expanded imperial bank-note 
issues, but with the makeshift currency of the 
"loan banks." In our Civil War, depreciation of 
the paper currency drove out of circulation, first 
the gold and then the small silver currency. 
When our people had been reduced to the use of 
postage-stamps in making petty payments, the 
government intervened with issues of paper notes 
for fractions of a dollar. On the European Con- 
tinent a precisely similar evidence of depreciation 
made its appearance during 191 5. 

In France, for instance, municipalities put out 
paper notes for a franc or less, convertible into 
notes of the Bank of France. All this structure 
of inflated currency must be taken in hand by the 
Eiu-opean governments when war is over. The 
process will be economically difficult — ^not only 
because contraction after inflation is always a 
trying experience, but because resumption of gold 
payments on a depreciated currency is usually 
effected through large governmental loans, whereas 
the strain on the public credit of the present bellig- 
erents has been quite unprecedented. To what 
extent the accumulations of gold, obtained by 
continental governments through the voluntary 
action of their citizens, will serve to facilitate or 
hasten the subsequent return to specie payments, 



i62 CURRENCY INFLATION 

is itself a matter of conjecture. These new gold 
reserves may be needed for other purposes also. 
The outcome will in all probability be a finan- 
cial chapter such as will cover many years after 
return of peace. It will not be the less interesting 
a chapter in economic history, when it is prac- 
tically a certainty that at least a great part of the 
needlessly large war-time accumulation of gold in 
the United States will in due course, and probably 
to our own financial advantage, move back to 
Europe. 



CHAPTER IX 
THE FOREIGN EXCHANGES 

NOTHING in the economic history of this 
war has been more profoundly interesting 
than the action of the foreign exchanges. 
The unprecedented scope of the movements which 
occurred with such swiftness and violence in 191 5, 
not only threw fresh light on the principles of 
economic science, but in the popular view a wide 
political significance was imputed to them. What 
was described as the sensational depreciation of 
exchange on Germany in the neutral markets of 
the world, those neutral markets accepted very 
generally as evidence of rapidly increasing weak- 
ness in Germany's position. When exchange on 
London at New York, a few months later, suffered 
a similar spectacular depreciation, the inference 
was widely drawn that the financial strain of war 
on England had approached the breaking-point. 
However much these popular assumptions may 
have exaggerated the economic situation, and 
notwithstanding the rejection of them by econ- 
omists in the nations immediately concerned, 
the governments showed grave uneasiness. Of- 

163 



1 64 THE FOREIGN EXCHANGES 

ficial action, sometimes of a character new to 
economic history, was taken to arrest the move- 
ment. Not only was the pubHc credit employed 
for this purpose, but in two of the most powerful 
belligerent states, the investment securities of 
private citizens were taken into control of the 
national treastiry and sold or pledged by the 
government to regulate the foreign exchanges. 

To the ordinary observer of events, the foreign 
exchange market is always apt to seem a net- 
work of bewildering technicalities. Most well- 
informed people know, in a general way, that an 
emphatic movement of exchange rates against a 
given country, on the other great money markets 
of the world, is a sign that financial conditions in 
that country, and sometimes political conditions, 
are unfavorable. Such action of the foreign ex- 
change market is recognized as a sign that in- 
vested capital is leaving the country. Every one 
at all familiar with business affairs is also aware 
that a great increase of a country's export trade, 
in a given season, helps toward the favorable 
movement of the foreign exchanges, and that 
decreased exports will have the opposite effect. 
But beyond these very general conceptions, the 
exchange market is quite commonly regarded as 
an intricate puzzle, which may as well be left for 
discussion by specialists. 

Yet the principles which underlie the fiuctu- 



PRINCIPLES INVOLVED 165 

ations of foreign exchange are in reality very- 
simple, and my reason for reviewing them here is 
that the meaning of the remarkable war-time 
phenomena of 19 14 and 191 5 can be understood 
only through clear insight into the actual machin- 
ery of the market. The intrinsic value of the 
British sovereign in American money being 
$4.86^, of the French franc 19.3 cents, and of 
the German mark 23.8 cents, those values neces- 
sarily represent the normal parity at which such 
European currencies may be exchanged for Amer- 
ican dollars. When payments due from the Amer- 
ican to the English market, for example, equally 
balance the payments due from England to the 
United States, the rate of exchange on the open 
market will be the intrinsic parity of $4.86^ to 
the poimd sterling. In such case the total sum of 
drafts by each market on the other would be 
exactly equivalent to the credits available in each 
market for account of the other. But if payments 
due from one side are greater than from the other, 
the more largely indebted market must then, in 
order to make remittances, bid for drafts of in- 
ternational bankers on their private funds, and 
the rate asked by them will vary from the par of 
exchange in proportion as demand for ordinary 
trade remittances exceeds supply. 

Such excess of payments due from one market 
to the other might be met by sending gold. But 



i66 THE FOREIGN EXCHANGES 

in sending gold, the banker must reckon up the 
cost of freight, insurance, and loss of interest on 
the gold while in transit. He can afford to send 
it only when the rate bid by merchants, for the 
drafts on the credit established by the gold, has 
varied so far from intrinsic parity that the differ- 
ence will cover the cost of shipment. That rate 
is known in the market as the "gold point." 
Whereas the par of American exchange on Lon- 
don is $4.86^ to the pound sterling, a rate of 
about $4.83 >^ is the point at which gold can 
ordinarily be sent from London to New York. 
The exchange banker contracts to give to his 
London clients, in the form of a New York "dollar 
credit," about three cents less, for every pound 
sterling paid to him at London, than the exported 
English gold will exchange for at New York. The 
three cent discount measures the cost of ship- 
ping it. So long, therefore, as gold is freely sup- 
plied in ordinary times by banks of a given country 
to their large depositors, the inequaHty of pay- 
ments due between two markets cannot force any 
larger variation of exchange rates from parity. 
The debit or credit balance, as the case may be, 
will be adjusted by export of gold from one market 
to the other. 

These principles lie at the root of the whole 
remarkable episode of 1915 in the foreign ex- 
change market. What happened was that New 



BREAK IN STERLING RATES 167 

York exchange on London instead of stopping at 
the normal "gold point" of, say $4.83 K (which it 
reached in January, 1915), fell by the middle of 
February to $4.79, a figure never reached before, 
except for a moment in the disastrous panic of 
1857. At the end of June it had touched $4.76; 
at the opening of September it was quoted at the 
extraordinary rate of $4.50, with some transac- 
tions reported as low as $4.48. This was the 
furthest point to which the exchange market went 
in its abnormal movement against London. But 
it represented a depreciation of nearly 8 per cent, 
and was a wholly impossible rate if international 
credit and international exchange of gold were on 
the footing of normal times. But, exceptionally 
violent as was this movement of exchange on 
London, quoted in the greatest neutral market, the 
other belligerent states had worse conditions to 
confront in foreign exchange. As against the 8 
per cent depreciation in New York exchange on 
London, the New York rate on Paris at one time 
in 1 91 5 recorded a depreciation of 17/^ percent, 
while the rate on Berlin was quoted 25^ per cent 
below normal parity. Austrian exchange sold 
at a discount of 40K per cent, Russian exchange 
at a discount of nearly 60. 

What, then, was the actual economic meaning 
of so remarkable and, for the belligerent countries 
so general, an adverse movement of exchange ? 



i68 THE FOREIGN EXCHANGES 

In the case of England and France, their purchases 
from the United States, first of grain and then of 
war munitions, created so huge a surplus of mer- 
chandise imports over exports that the pendulum 
of exchange was bound to swing heavily against 
their markets. Nor did the immensely increased 
import trade of the two European belligerents 
from America tell the whole story of the "mer- 
chandise balance." While such imports, during 
191 5, ran something like $700,000,000 beyond 
1 9 13, the last preceding year of peace, the export 
trade of the belligerent coimtries decreased with 
similar rapidity. Their productive energies were 
curtailed by the heavy drain on able-bodied labor, 
first by the army and then by the mimitions fac- 
tories; so that, from this and other causes, mer- 
chandise exports from England alone decreased 
from 1913 no less than $700,000,000, or 26 per 
cent. 

The course of events in France was pre- 
cisely similar. This xmparalleled increase in an- 
nual payments due on merchandise accoimt to 
the outside world in general, and to the United 
States in particular, occurred at the moment when 
the supply of remittances from America, to pay 
for the $200,000,000 or more per annum in the 
expenditure of American tourists, had been sud- 
denly and almost completely cut off by the war, 
and when the transfer of capital from London to 



LONDON AND NEW YORK 169 

New York — especially balances owned by mer- 
chants or bankers with headquarters in other 
markets — ^was reaching large proportions. We 
have already seen how London's partial abandon- 
ment of its functions as the money centre of the 
world made this shifting of capital inevitable. 
But every such transfer necessitated further in- 
crease in the demand for drafts on New York, and 
emphasized the balance adverse to London in the 
exchange market. The movement was greatly 
stimulated by the contrast between the war taxes 
and restrictions on investment which were imposed 
on capital at London, and the free opportunity 
for its use in a prosperous and peaceful market, 
which New York presented. The "balance of 
trade" against France and England had never 
been so great in their history. 

Still, it will be remarked that in the case of Eng- 
land (and the same was true of all the other 
belligerents) the actual rate at which their cur- 
rency exchanged in 191 5 for that of a prosperous 
neutral state was a rate which would have been 
impossible if gold had been exported in such quan- 
tity as to make good the international balance. 
It followed necessarily, therefore, either that gold 
was not thus exported or that it was not shipped 
in sufficient quantity. As a matter of fact, Lon- 
don alone continued to export gold at all, to 
meet its commercial indebtedness abroad. I have 



I70 THE FOREIGN EXCHANGES 

shown in a previous chapter how large were these 
shipments to New York on England's account; 
in 1915 they exceeded $300,000,000; in 1916 they 
were even larger. But they were evidently not 
large enough. The $61,000,000 gold, for instance, 
imported by the United States in August, 1915, 
and mostly sent from those two quarters, was 
far from sufficient to restore the international 
balance and prevent exchange from touching the 
most unfavorable rate of all at the opening of 
September. It is questionable whether gold 
enough to correct by itself the disparity in ex- 
change cordd have been obtained in London with- 
out virtually exhausting the reserve of the Bank 
of England. Therefore, other means had to be 
employed to correct the depreciation in exchange. 
In September the British Government sent to 
this country a commission of eminent financiers, 
with the purpose of floating here a loan of large 
proportions. Originally, the commissioners pro- 
posed that the American investment markets pur- 
chase $1,000,000,000 worth of five-year bonds, 
guaranteed jointly by the English and French 
Governments. Bankers before whom this pro- 
posal was laid demurred to the amount. The sum 
was very large; even the United States Govern- 
ment had never in its history asked for that much 
in a single loan from investors of this country. 
Furthermore, our investors were not familiar with 



THE ANGLO-FRENCH LOAN 171 

foreign securities. The entire proposal was vig- 
orously opposed by pro-German interests; there 
was talk even of a protest from the German 
embassy. The amount applied for was finally re- 
duced to $500,000,000. 

On the other hand, the terms of the loan em- 
bodied remarkable concessions. It was to pay 5 
per cent interest, as against the 4/^ per cent rate 
of the latest British domestic war loan and the 
2)4. per cent rate of the old consols; it was offered 
at 96, as against a price of par for the recent 
war loan. With five years to rim, the loan was 
to be payable, interest and principal, in Amer- 
ican gold coin in this country. Unlike all previous 
British Government loans, it was to be exempt 
from the English income tax. When it was con- 
sidered that, almost within a year, Great Britain 
had placed a new loan at 3 per cent and France 
a loan at 3^, the concessions were very note- 
worthy. 

Yet they had seemed to be called for by the 
situation. Even among people who were in sym- 
pathy with England in the war, there was much 
discussion of whether so huge a diversion of 
American capital to a foreign investment might 
not affect our own markets adversely, and whether 
the strain on England's financial resources might 
not impair the soundness of this loan. In many 
minds, the depreciation of exchange on London 



172 THE FOREIGN EXCHANGES 

was imagined to reflect depreciation of the Eng- 
lish Government's public credit. 

It was these apprehensions which, at the out- 
set, threw on the prospect of a successful public 
subscription to so great a loan stufficient doubt to 
make unusually attractive terms an essential re- 
course. A week or two of discussion cleared up a 
good deal of misunderstanding. The public began 
to realize that when the British Government had 
just raised $3,000,000,000 on a single loan at 
home, and had added $1,500,000,000 to England's 
annual budget of taxation, it was hardly to be 
supposed that it could not, even without the joint 
guarantee of France, provide for a $500,000,000 
foreign loan. That the fall in foreign exchange 
on London did not mean England's inability to 
pay its foreign debts, but merely its inability to 
meet them through gold exports, began to be un- 
derstood. So did the fact that even suspension 
of gold redemption for the currency would not 
signify, with England of 191 5 any more than with 
the United States of 1865, that the government 
could not easily pay in gold the interest and prin- 
cipal on its public debt. The loan was floated 
successfully during the autumn months of 191 5. 

It was clearly avowed, while the negotiations 
were in progress, that the purpose of the $500,- 
000,000 loan was to stop the depreciation of ex- 
change on London. It was not understood by 



RECOVERY IN STERLING 173 

everybody, even then, how the loan could have 
that effect. The principle involved was, however, 
plain enough. The violence of the adverse move- 
ment in exchange had been caused very largely 
by the payments made from London to New York 
for the British Government's purchases of war 
material. The drafts on London for that purpose 
had completely upset the market for international 
exchange. Now, with a $500,000,000 credit es- 
tablished in the United States, as a result of the 
new loan, the British and French Governments 
might pay the munition bills up to that amount, 
not with drafts on London but with checks on the 
American banks in which the proceeds of the loan 
had been deposited. To that extent the unwieldy 
surplus of bills of exchange drawn against Lon- 
don was bound to be reduced. The rate of ex- 
change, in fact, moved at once in London's favor, 
going in a very short time from $4.50 to a fraction 
above $4.75, around which slightly depreciated 
level it remained throughout the ensuing twelve- 
month. 

From the view-point of exchange on London, 
then, the Anglo-French loan achieved its purpose. 
It did not have the predicted adverse effect on 
our own investment market or on the New York 
money rate; but for this one reason was, that the 
proceeds were deposited with American banks 
until the British Government should draw on 



174 THE FOREIGN EXCHANGES 

them to make its payments, and that when it did 
thus draw, the money was transferred from Amer- 
ican deposit banks to American manufacturers. 
The argument that the loan was not a sure and 
safe investment, that the borrowing governments 
might perhaps not be able to pay it at maturity, 
lasted longer than the other. This notion was a 
not wholly iinnatural outgrowth from the be- 
wildering evidence of economic strain, as the war 
continued. No argument, however, could well 
have been more absurd. Seeing that interest and 
principal were expressly made payable in gold 
and at New York, fulfilment of the contract was 
necessarily a measure of the international solvency 
of the two great borrowers. In effect, even if not 
in form, this loan for $500,000,000 was a first 
lien, not only on the thrifty French Republic 
but on the British Empire, and on the total re- 
sotirces of those English citizens who added $1,- 
500,000,000 to their annual tax-roll during the 
first two years of war. 

In coiirse of time, the credit balance thus es- 
tablished in America was drawn down by the 
accruing payments for munitions. The London 
bankers provided for this condition in advance by 
raising a $50,000,000 loan on their own account 
from New York bankers, and by drawing on this 
fund also, whenever the rate of exchange showed 
signs of once more moving against London. A 



ENGLAND'S INVESTMENTS 175 

few months later the British treasury intervened 
with a very remarkable undertaking. Something 
of the adverse balance of exchange had been met 
through sales by English investors of their Amer- 
ican securities to New York. Up to the middle 
of 1 916, $1,500,000,000 of these stocks and bonds 
were believed to have been thus resold. From time 
to time, however, the selling movement slack- 
ened; it began to seem as if the English investor 
was disposed to keep what was left. 

A thorough and careful estimate by an American 
railway president, based on investigation of the 
amount of our railway securities which were reg- 
istered in foreign names and reported under the 
income-tax provisions, indicated that $2,223,500,- 
000 of them were still owned abroad in the mid- 
dle of 1915. At least $1,750,000,000 must have re- 
mained in foreign hands at the end of the year, in 
addition to an amount of our industrial securities 
perhaps one-half as great; and English investors 
undoubtedly owned the bulk of them. Early in 
1 91 6 the British Government appealed to such 
English holders to sell all their American securities 
to the government at prices close to those of the 
current market, or to lend them to the treasury, 
for the period of war and on stipulated terms. 

The obvious purpose was to place the govern- 
ment itself in a position enabling it to insure the 
sale of these securities in New York whenever its 



176 THE FOREIGN EXCHANGES 

New York credit balance needed to be increased, 
or to use the securities as a basis on which to bor- 
row in New York. Both expedients were largely 
utilized. The French Government, following suit, 
collected from its own citizens a mass of foreign 
securities, large enough to serve as collateral for 
a loan of $100,000,000 in New York. So far was 
the undertaking carried by Great Britain that, 
later in 191 6, the already very high income tax 
was increased by 10 per cent in the case of income 
derived from certain foreign securities ; this for the 
purpose, plainly avowed by the government itself, 
of forcing holders of such stocks and bonds to de- 
liver them to the treasury, whether they wished 
to give them up or not. The immediate sequel to 
this action, and to the large deposits of such 
securities, was the borrowing by the British Gov- 
ernment in this country, during August, 1916, of 
$250,000,000, secured by pledge with a New York 
trust company of $100,000,000 American stocks 
and bonds, $100,000,000 Canadian securities, and 
$100,000,000 bonds of neutral states. 

This series of extraordinary economic measures, 
applied by England and France to offset the potent 
influences operating to depreciate their exchange 
markets, achieved their purpose in the case of 
England to the extent of cancelling the greater 
part of that depreciation and holding the exchange 
rate steady. In the case of France, the effort was 



THE CASE OF FRANCE 177 

less successful; the improvement of exchange, 
after the most imfavorable rate had been touched 
early in 191 6, still left the market, in the middle of 
that year, at a discount of 14 or 15 per cent from 
parity. The failure to accomplish the desired re- 
sult may doubtless be ascribed in large degree to 
the fact that the French market lacked the eco- 
nomic resources of England ; in particular, that its 
holdings of American securities, available for sale 
on the New York market, were trifling in compar- 
ison with those of England — for years a habitual 
investor on an enormous scale in our stocks and 
bonds. 

But another important influence, which did not 
prevail at London, operated at Paris to prevent 
correction of the depreciation in exchange. This 
was the fact that, since French paper bank-note 
currency had been prodigiously inflated, and 
since redemption of that currency in gold had 
been tacitly abandoned, the foreign exchange rates 
must have reflected not only the abnormal "trade 
balance" against the French Republic, not only 
the flight of foreign capital, and not only loss of 
the annual drafts on New York banks to pay for 
American tourists' expenditures, but an actual 
depreciation of the currency. It was exchange 
on Berlin, however, whose movement brought 
this aspect of the economic situation into sharpest 
controversy. 



178 THE FOREIGN EXCHANGES 

German exchange, as I have shown, was more 
seriously depreciated than exchange on either 
London or Paris. As against its intrinsic value of 
23^ cents in American currency, the exchange 
value of the German mark fell to 17^ cents in 
1915. Recovering slightly from that very de- 
preciated level, the rate fell lower still in 19 16, 
and the market for Austrian exchange moved 
similarly. The actual situation of Germany's 
foreign trade, during the war, was such as to make 
somewhat less simple the explanation for this 
movement of exchange. Whereas one perfectly 
obvious reason for the depreciation of English 
and French exchange was the enormous war-time 
"balance of merchandise trade" against those 
nations, the ocean trade of Germany virtually 
ceased in the early autumn of 19 14, when her 
ships were driven from the sea and her ports 
blockaded by the English fleet. 

It has been a very general contention, on the 
part of German economists and financiers, that 
this embargo on the country's foreign trade ac- 
counts for the fact that exchange depreciated 
more violently and persistently at Berlin than at 
Paris or London. A common saying, in the for- 
eign exchange market itself, was that the absence 
of international trade in merchandise made the 
market for New York exchange on Germany 
purely "nominal," because there were virtually no 
commercial transactions on which to base the 



GERMANY'S POSITION 179 

rate. But this is scarcely a valid explanation; 
the exchange was equally depreciated in every 
other great neutral market of the world. Even 
supposing Germany's foreign trade to have 
ceased entirely, bankers' drafts between Berlin 
and neutral markets (by wireless telegraph or 
otherwise) would still be feasible. The deter- 
mining influence on exchange rates would still, 
therefore, be the excess of payments actually 
made between Germany and those outside mar- 
kets. If Germany had in time of peace been ac- 
customed to export more merchandise than she 
imported, cessation of that trade would, ipso 
facto, operate to her disadvantage on exchange. 
But the case was precisely opposite with Ger- 
many's foreign trade in time of peace; imports 
largely exceeded exports. 

While, moreover, the depreciation in English 
and French exchange was largely attributable to 
enormous purchases of war material in America, 
that influence at any rate was wholly absent in the 
case of Germany. The Western hemisphere could 
not have sent mimitions to Hamburg or Bremen, 
however much it might have desired to do so. 
To the extent, therefore, that payments for these 
"mimitions shipments" were a factor in exchange, 
the New York rate on Berlin shoiild have depreci- 
ated less, not more, than the rate on London or 
Paris. 

Notwithstanding the many cross-currents and 



i8o THE FOREIGN EXCHANGES 

unseen influences bearing on international ex- 
change, it is impossible to escape the conclusion 
that the depreciation in the German rate measured 
largely, and in fact primarily, depreciation of the 
German currency. I have shown in a previous 
chapter, while discussing the actual status of 
that currency, the reasons why the currency was 
depreciated, and why such depreciation was 
bound to reflect itself in the foreign exchange 
market. Briefly summed up, the well-known facts 
are, that Germany's paper currency had been 
enormously inflated; that redemption in gold, 
even of imperial bank-note issued, was suspended 
when the war began ; that an actual premium was 
apparently at one time bid on gold; that such 
bids were then made a penal offense by the Ger- 
man Government; that the American ptirchaser 
of a draft payable at Berlin knew, therefore, that 
the draft would be paid, not in gold or its equiva- 
lent, but in paper currency, irredeemable to-day 
and with no future date assigned for its redemp- 
tion. 

All of these facts being perfectly understood in 
the exchange market, it would be on its face in- 
credible that an American banker, purchasing 
such a draft with American money redeemable in 
gold, should pay for it what he paid when he could 
get gold in return for it at Berlin. In a closely 
parallel historic instance, when the Bank of Eng- 



AN OLD PRECEDENT i8i 

land, in the Napoleonic War, had suspended gold 
redemption of its notes, and when exchange on 
London at important foreign cities had gone to 
20 per cent discount, there were merchants who 
protested that the whole depreciation was, due 
to Napoleon's embargo on English trade with 
northern Europe. A very eminent banker, tes- 
tifying before a parliamentary committee, thought 
otherwise. Although the depreciation in ex- 
change might have originally occurred "in con- 
sequence of the measures of the enemy," he 
ascribed "its not having recovered to the circum- 
stance of the paper of England not being ex- 
changeable for cash." The committee indorsed 
this view, despite its impopularity in commercial 
London; concluding that the "rise in the market 
price of gold in this coimtry, coupled with so 
remarkable a depression in oiu" exchanges, . . . 
pointed to something in the state of our own 
domestic currency as the cause of both appear- 
ances." The case of Germany is identical, ex- 
cept that, imlike the England of 1809, she has 
suppressed the premium on gold by law. 

It has been urged, in arguments against this 
somewhat obvious conclusion, that the blockade 
had prevented Germany from regulating its ex- 
change market through exporting gold, like Eng- 
land, or through placing loans with neutral states, 
like both France and England. But a govern- 



1 82 THE FOREIGN EXCHANGES 

ment which has formally suspended gold payments 
does not usually export gold, even if opportunity 
admits, and Germany's attempt to send gold in 
moderate amounts to near-by neutral markets, 
with the view of drawing on the fund thus estab- 
lished and supporting the exchange rate, met with 
early failure. As for selling to investors of neutral 
markets the new government seciuities of Ger- 
many, the experiment was tried. 

The German Government actually placed some 
$25,000,000 of short-term notes in the American 
market, and efforts were made to interest Amer- 
ican investors in the large German war loans. 
But the last-named and larger undertaking failed 
of success, as an offer by any other belligerent, 
of neutral participation on a large scale in its 
domestic war loans, would have failed. Such 
participation in the German war loans meant 
that, since interest and principal were payable at 
Berlin and in current German funds, the American 
holder would actually receive his interest only 
after deducting the abnormal discount on ex- 
change. Our people were sometimes urged to in- 
vest on the ground that the same depreciation in 
exchange enabled them to buy the German war 
bonds at a lower figure than their nominal price 
of issue at Berlin, and that the post-bellimi re- 
covery of exchange to normal rates would there- 
fore amoimt, in the American investor's case, to a 



PROBLEMS OF THE FUTURE 183 

great increase in value of the bonds. But this 
was clearly enough at bottom a speculation in 
exchange. No one could surely say what would 
be the status of the German currency even on 
return of peace, and therefore nobody could pre- 
dict with confidence what the rate of exchange 
would be. 

But behind all technical and specific causes for 
the war-time movement of the foreign exchanges 
on the belligerent countries stands the fact that 
it must reflect, both actually and relatively, the 
impairment of their economic resources. The 
question, how long a time will be required, after 
peace, before the economic effects of this process of 
depletion shall have been corrected, is one of the 
large economic uncertainties of the future. What 
we know is that France, Germany, Austria, and 
Russia will have to wrestle with that problem as 
no other great nations have had to wrestle with 
it since the United States emerged from the Civil 
War. 



CHAPTER X 

WHEN THE WAR ENDS 

10NG before the European War had com- 
pleted its second year, the question of how 
it might be ended, of what the terms of 
settlement would be, of how return of peace would 
affect the political and economic situation, had 
been anxiously discussed by the people of neutral 
as well as of belligerent nations. The question of 
peace itself had drawn forth official utterances 
from statesmen of the fighting Powers, as early 
as 191 5. The British premier, answering Parlia- 
mentary inquiries on December 8 that year, 
merely stated that "if proposals of serious char- 
acter for a general peace are put forth by the 
enemy governments, either directly or through 
neutral Powers, they will be discussed by the 
allied governments." The German chancellor, 
after an equally non-committal pledge to the 
Reichstag, on December 9, of his government's 
willingness to consider the enemy's appeal, com- 
plained that this enemy "has not approached us 
with suggestions of peace," a fact presumably due 
to "self-deception beyond compare"; and that, 

184 



EARLY IDEAS AS TO PEACE 185 

"so long as belief that Germany is approaching 
collapse continues to be the dominant idea in 
enemy countries, it would be folly for Germany to 
take the initiative." 

This last remark referred to various public 
utterances of the enemy, but perhaps especially 
to the declaration of December 5 in the Paris 
Chamber, by the legislative spokesman of the 
French War Department, that "there will be no 
peace until Alsace and Lorraine are won, Belgium 
and Servia restored, German imperialism and 
Prussian militarism put beyond the possibility of 
resurrection." There was left by way of peace 
proposals, after these not very illuminating utter- 
ances, the sullen demands of the Opposition 
party (notably at Berlin) for the government to 
state its explicit terms, and the performances of 
the shipload of eccentric philanthropists sent to 
Europe in the summer of 191 5 by an American 
millionaire. 

But people familiar with history recalled, as 
regards the Opposition protests, that in 1864 
even the Republican party's executive committee 
urged Mr. Lincoln (unsuccessfully) to offer peace 
to Jefferson Davis on condition that deference to 
the Constitution be professed. The grotesque 
incident of the "peace ship" could be matched by 
the visit to the Confederate capital of a militant 
Northern clergyman, with a powerful backing, to 



1 86 WHEN THE WAR ENDS 

settle the Civil War through the influence of the 
Methodist Church. Even the European govern- 
ments' public attitude of 191 5, in regard to the 
rumored proposals for peace negotiations, was 
fairly anticipated when Napoleon, rejecting in 
1 813 the only possible policy which could immedi- 
ately have ended that period's European war, 
declared that "I wish for peace, it is necessary to 
the world"; but "I shall never make any peace 
except one suited to the interests of my empire." 
In short, the world was merely witnessing the 
usual order of events. 

Along with the conflicting public utterances 
of the statesmen it became increasingly evident, 
as the war went on, how divergent were the views 
entertained by the world at large regarding its 
termination. The great body of humane senti- 
ment undoubtedly held the ground that war 
could not be ended too soon; that the civilized 
world must be relieved from this frightful incu- 
bus; that peace, however achieved, was a para- 
mount necessity of civilization. There was also 
visible, however, even in peaceful neutral com- 
munities, a feeling that the war ought not to be 
allowed to end imtil Germany should have been 
made to suffer the humiliation suited to a govern- 
ment which, for its own ambitious purposes and 
under the domination of a military cabal, had 
provoked such a conflict; whose violation of 



FINANCIAL OPINION 187 

treaty, contempt for the recognized rules of mod- 
em war, burning of captured cities, exaction of 
tribute, use of poisonous gases, and murder of 
non-combatants on the seas, had created a situa- 
tion in which mere restoration of the status quo 
ante helium woiild be mockery. 

Looking at the situation from yet another 
point of view, financial and industrial markets 
have seemed to change their attitude repeatedly. 
During the first five or six months of war, when 
the whole economic world was paralyzed under 
the influence of the sudden cataclysm, the single 
opinion seemed to be that nothing could set things 
right but speedy return of peace. Presently, 
however, the powerful neutral states began to 
discover their own exceptional economic advan- 
tages. New York received from London its tem- 
porarily abandoned sceptre of economic leader- 
ship. The world's supply of capital gravitated to 
America. Our gold supply, our business activities, 
our export trade, rose to unprecedented magni- 
tude. The foreign exchanges moved in a spec- 
tacular way in favor of New York; then came the 
notable movement of American prosperity. 

The word was passed about that this prosperity 
was bound up with the European War, and that 
what we had most to fear, by way of a check to 
that prosperity, was the return of peace. A very 
exceptional confusion of judgment was the result. 



1 88 WHEN THE WAR ENDS 

On the stock exchange, whose action is commonly 
supposed to reflect the opinion of inteUigent busi- 
ness men, prices would advance one day on mili- 
tary news which seemed to indicate shortening 
of the war, yet break sharply the next day on 
rumors of peace negotiations. All this made the 
stock market as perplexing a measure of the real 
situation as were the battle news and the several 
war-offlce bulletins, in a month when the furious 
fighting around Verdun alternated with reports of 
tentative proposals to end the war. 

The "peace rumors" were themselves confusing. 
In the nature of the case, overtures for peace 
had to be of the most roundabout and unofficial 
character; because any government that should 
publicly and officially ask what terms would be 
acceptable to its antagonists would thereby sug- 
gest on its own part military weakness or weari- 
ness of war. There is little doubt, however, that 
an effort at opening peace negotiations was made 
through Austria and the Vatican in August, 191 5, 
immediately after the Austro- German army had 
defeated Russia in the Carpathians and had crossed 
the Russian border. In official Petrograd, it was 
positively stated at the time that offers of a 
separate peace had been made by Germany to 
Russia. The report of simultaneous overtures, 
through Austria and the Vatican to the other 
Allies, drew forth the French premier's declara- 



BERLIN'S INTIMATION 189 

tion to the deputies, in August, that recovery of 
Alsace-Lorraine and Belgium was the irreducible 
minimum. It is practically certain that in De- 
cember, when the defeat of Servia had been made 
complete, Prince von Blilow endeavored to ar- 
range some basis of negotiation in Switzerland. 

Nothing resulted from any of these overtures. 
Nevertheless — partly because of doubts as to 
what economic conditions would follow return of 
peace, and partly because of the enormous profits 
earned by various American companies through 
Europe's orders for war munitions — the financial 
markets undoubtedly seemed at times to regard 
the prospect of a sudden end to war as an unfavor- 
able influence on values. In particular, the Ger- 
man chancellor's voluntary intimation to our 
ambassador at Berlin, of the terms of peace 
which would be acceptable to Germany, was re- 
flected unmistakably on the stock exchange, 
where prices of the "war munitions shares" fell 
5 to 40 per cent within a very few days on the re- 
port of that interview. 

But when this political incident — followed 
though it was by reiterated assertions, on the 
part of German statesmen, of their wish to bring 
about peace on their own terms — elicited only the 
reply from the enemy that the terms were not 
admissible, even the stock exchange lost interest 
in the matter. Reference to history readily dem- 



190 WHEN THE WAR ENDS 

onstrated that nearly all wars of the past cen- 
tury had been ended only when one completely 
defeated belligerent sued for peace. It was recalled 
that all the efforts of the larger European Pow- 
ers, to intervene or mediate in the Balkan War 
of 1 9 13, accomplished no more than a temporary 
truce between the Balkan states and Turkey; 
that it was only when the Balkan allies attacked 
one another, and when Bulgaria, rendered help- 
less by Rumania's armed intervention on the side 
of Servia, herself asked peace at Bucharest, that 
the war was definitely terminated. The Boer 
War, like our own Civil War, ended with the 
complete defeat of one antagonist, the disinte- 
gration of his forces, and the people's acceptance 
of the terms laid down by the victorious govern- 
ment. 

In the Crimean War of 1856, as in the Russo- 
Turkish War of 1878 and in our own Spanish 
War of 1898, the defeated belligerent asked for 
terms. It was the provisional French Government 
of 1 87 1 that applied for the terms of peace, and 
had to take what Prussia granted. Even in the 
case of our government's successful mediation of 
1905 between Japan and Russia, with the assent 
of both belligerents, the financial markets knew 
that, whatever may have been Japan's economic 
necessities (and the record has by no means 
proved them to have been urgent), the larger in- 



THE HOPEFUL VIEW 191 

fluence In promoting a settlement was the pres- 
sure applied to Russia by the Paris bankers who 
were financing her war expenditure, and whose 
growing tmeasiness over the signs, not only of 
economic difficulties but of coming political col- 
lapse in Russia — which, as a matter of fact, oc- 
curred only a few months later — ^was a paramount 
force in bringing the two antagonists together. 
There was no one to apply such outside pressure 
to the present belligerents; they were financing 
the war themselves. 

But that the war would have to end at no very 
distant date, apparently remained a certainty, 
and as to what its ending would mean to the finan- 
cial and economic world, a most striking conflict 
of opinion continued to prevail; the conflicting 
judgments being framed, in fact, along two wholly 
divergent lines of reasoning. According to one 
of them, this war was itself so immense a calam- 
ity, both political and economic, that its ending 
must introduce financial recovery throughout the 
world. To American commerce it would reopen 
the blockaded ports of Europe; in behalf of 
American finance it would avert the conceivable 
forced sale in our markets of the one or two thou- 
sand millions of American securities still owned in 
Europe. It would remove at once the overhang- 
ing possibility of the European conflict taking a 
desperately destructive turn, or of the United 



192 WHEN THE WAR ENDS 

States itself being dragged into war. This being 
so, a spontaneous outburst of relief ought to 
govern events throughout the economic world. 
Neutral countries would emerge from a period of 
long suspense, without the prospect of that 
aftermath of economic exhaustion which bellig- 
erent Europe must undergo, with abundant ma- 
terial resources of their own in hand, and with 
the certainty that Europe must depend on 
their productive resources for physical rehabilita- 
tion. 

As against this cheerfiil forecast, it was asserted 
by people of the opposite opinion that trade, even 
in neutral states, had been supported, since the 
war began, by the military demands of belligerent 
Europe. Not only must those activities cease 
instantly with the ending of war, but the fictitious 
character of the buying demand would at once 
become evident. European governments would 
be overloaded with debt and the European peo- 
ple crushed with taxes. How, then, would either 
of them be able to pay for American exports, if a 
large export movement were to continue after 
war? No European state could long postpone 
the reform of its inflated paper currency, or the 
removal of those emergency expedients in credit 
whereby general insolvency was averted in the 
preliminary strain on credit when the war began. 
But that is a process of contraction which, as a 



ECONOMIC READJUSTMENT 193 

good deal of experience has taught, will aggra- 
vate hard times. 

Furthermore, although prices of American 
commodities had not been inflated by depreciated 
currency in the United States, every one of our 
products used in war (such as copper, lead, zinc, 
and probably steel) had been abnormally enhanced 
in price by the military demand — sometimes 100 
or 150 per cent from the prices of 19 14. Those 
markets would have to face violent readjustment; 
prices for the same metals fell 30 to 50 per cent 
in the first year after Waterloo, although their 
use for munition purposes had been far less ex- 
tensive then than now. All home industries 
using such materials would have a more or less 
similar experience to undergo. 

Demand for our wheat was undoubtedly kept 
up by the blockade, during more than two years, 
of wheat exports from Russia, a country which 
produces one-fourth of the whole world's wheat 
crop. But Odessa and Riga would be reopened 
at once to the wheat-consuming world. Not 
least of all, our manufacturers, responding to the 
imprecedented demands of Europe, had invested 
immense sums of capital in plants to produce 
munitions of war. That trade would practically 
end with the war. The companies and their 
shares (whose prices were in 1915 put up 200 to 
1,200 per cent on the stock exchange) must come 



194 WHEN THE WAR ENDS 

back to a normal basis, with great incidental dis- 
turbance. These considerations, it was usually- 
pointed out, were independent of the other dis- 
puted question, What will be the character of 
Europe's post-bellum competition with our man- 
ufacturing industries, whether in the home mar- 
ket or in the export trade ? 

At the end of 191 5, the main question thus 
disputed was put categorically by a New York 
newspaper to 26 well-known bankers, manufac- 
turers, economists, government officials, railway 
managers, and capitalists. Of the answers, 14 
were to the effect that American prosperity would 
continue after peace; 10 were of the opposite 
opinion; 2 were undecided. This distribution of 
opinion no doubt reflected accurately enough the 
judgment of the intelligent general public. 

But all the answers pointed to the inference 
that a period of great perplexity and unsettlement 
would inevitably follow the ending of the war, 
and that it must be left for the longer future to 
determine what this epoch-making war will have 
meant to economic history. That history, in the 
past, undoubtedly teaches that the settlement 
at the end of some of the world's great wars has 
had profoimd influence on the future economic 
position of the nations. Such influence was cer- 
tainly exerted in the sequel to the Seven Years' 
War, in which England ousted France from the 



LESSONS OF THE PAST 195 

American and Asiatic continents; making her- 
self, by the Peace of Paris in 1763, mistress of the 
Mississippi valley, of Canada and of India, and 
thereby changing the colonial history of the 
worid. Something of the enormous economic 
prestige with which England emerged from that 
celebrated conflict has at times been thought to 
attach to Prussia after the war of 187 1. But in 
that case, larger allowance is necessary than is 
usually made for the results of the German im- 
perial unity which followed the victory over 
France, and which performed for the cumbersome 
political structure of the German states a good 
part of what the Constitution of 1787 performed 
for this country. 

It is, in fact, easily possible to be deceived in 
drawing inferences of this character from success- 
ful wars. The question is not always settled by 
geography and territorial boundaries. Nobody 
seriously thinks of ascribing our own country's 
prosperity, in the half-dozen years after 1898, to 
the acquisition of the Philippines; it would be 
much easier to prove that the increased prosper- 
ity of Spain during the same period was promoted 
by the loss of them. The addition of the im- 
mensely valuable Transvaal states to her colonial 
dominions, as a sequel to the Boer War of 1899, 
was followed in England by a period of unques- 
tionably waning economic power. Japan spent 



196 WHEN THE WAR ENDS 

a series of years, after her successful war with 
Russia, in a state of financial depression. 

The truth is, that it needs exceptionally favor- 
ing circumstances to make a great war anything 
but a calamity, in its industrial sequel, to all the 
combatants. Politically, the rearrangements in 
the Peace of Westphalia were of high importance; 
beyond all else they settled, very largely, the long 
and seemingly hopeless civil conflict on questions 
of religion. Yet the Thirty Years' War neverthe- 
less left the population of Germany reduced, ac- 
cording to some estimates, by upward of 20 per 
cent, and it was quite a century before the Ger- 
man states again cut any large figure in Europe. 
If the great prosperity of the Northern United 
States, in the half-dozen years after the Civil 
War, is reckoned an exception, it must never be 
forgotten what part was played by the railway 
construction, the opening up of the new West, 
the increase in the coimtry's agricultural produc- 
tion, the immense immigration — a movement 
which, in the three last years of the war period 
itself, more than equalled all the losses of the 
North in battle, and which was larger still on re- 
turn of peace. 

None of these influences can possibly be dupli- 
cated in Europe after this war. They did not 
affect the whole of our own country, even at the 
time. So far had the South's economic power 



IN THE LAST CENTURY 197 

been crushed by the four-year conflict from 1861 
to 1865, that with all the spur applied through 
the pressure of hard times, and with all the urgent 
demand from home and foreign spinners, to re- 
plenish their almost exhausted supplies of raw 
material, it was not until 1878 that even the Amer- 
ican cotton crop again reached the size of that of 
1859. "The peace of Europe from the battle of 
Waterloo to the Crimean War," Thorold Rogers 
declares in his "Economic Interpretation of His- 
tory," "was the peace of languor," in which 
"Eiiropean nations were recovering from the 
losses which they had suffered for eighteen years 
of bloodshed." It is not the least of the problems, 
whether on the present occasion it will again re- 
quire the greater part of half a century for eco- 
nomic Europe to get fully on its feet. 



CHAPTER XI 

THE ECONOMIC AFTERMATH 

IF the problem of Europe's political recon- 
struction when the war is over — the question 
as to the changes which may be witnessed in 
the Rhine country, in the Ottoman dominions, in 
the Balkan states, in Europe's colonial posses- 
sions, in that jumble of nationalities known as 
the Austrian Empire' — ^has been beyond the reach 
of prophecy during the progress of the war, the 
problem of Europe's economic reconstruction has 
been quite as baffling. It is a problem which in- 
volves three distinct considerations — the future 
condition of each belligerent, taken individually; 
the place which each will hereafter occupy in the 
world's economic order, and the economic relations 
of each to the others on return of peace. 

All past experience goes to prove that the 
process of financial readjustment, after the strain 
of this present war is definitely over, will involve 
an economic strain of extreme severity, affect- 
ing every belligerent. Not only will the artificial 
stimulus of the prodigious government expendi- 
ture be withdrawn, and very suddenly, from the 

198 



CONDITIONS AFTER WATERLOO 199 

industries concerned, but there will then arise, in 
such shape as history has perhaps never before 
presented, the problem of bringing back to a 
normal basis the currency and credit systems; 
inflated and perverted as they have been by the 
remarkable "emergency expedients" which every 
government applied at the very outbreak of the 
war, and has continued to apply in the face of 
progressive decrease in the stock of accumulated 
capital. The notion that a prolonged and costly 
war will be followed ordinarily by prosperity and 
"boom times," is pure illusion. In the first year 
after Waterloo the average price of a long list of 
English commodities fell no less than 30 per cent. 
Land values came down at a rate which ruined 
hundreds of owners, speculators, and mortgage- 
holders. A long series of panicky movements 
occurred on the stock exchange in the three years 
after peace. The half-dozen years beginning with 
June, 1 81 5, were described by a contemporary 
English historian as a period "of almost unex- 
ampled adversity." 

Let it be remembered, first, how stupendous is 
the mass of current international liabilities, pay- 
ment of which was suspended on the declaration 
of war. Had the banking-houses, whose maturing 
credits at other European cities were thus suddenly 
made unavailable, been left to themselves, bank- 
ruptcies on a portentous scale must inevitably 



200 THE ECONOMIC AFTERMATH 

have followed. That result was averted through 
the use of banking credit, under government 
guarantee, to an extent never previously known 
in banking history. But these emergency credits 
and government guarantees were arranged to 
end with the period of war. Except where liqui- 
dation of other assets has enabled the firms in 
question to anticipate that settlement, return of 
peace must bring the hour of reckoning. For the 
assisted houses must repay the bank or the gov- 
ernment, and must look to recoup themselves 
from their foreign correspondents, who will them- 
selves, at that very time, have their own hands 
full at home. 

Nor is the case very different with the immensely 
expanded paper currencies. Note circulation of 
the Banks of France, Germany, Russia, and Italy 
was expanded $3,500,000,000 in the first full year 
of hostilities; an increase of no less than 121 per 
cent, and this not including new paper currency 
other than bank-note issues. In the same four 
states, it increased $2,600,000,000 more in the 
second year of fighting. If these are to be re- 
stored to normal proportions when the war is over 
— if Germany and France especially are to return 
to a basis of gold redemption for their bank-notes 
on demand — an extremely trying period will con- 
front the whole of Europe. What the precise at- 
tendant phenomena will be, it is not at all easy 



BELLIGERENT EUROPE 201 

to predict. The reasonable certainty is, that the 
process of readjustment will be long drawn out, 
and that "emergency expedients" which were to 
end with the ending of the war will be repeatedly 
extended. It was six years after the battle of 
Waterloo before the Bank of England fully re- 
sumed gold as payments. One of Lloyd-George's 
predictions to Parliament, when chancellor of the 
exchequer in 19 14, was that the really acute stage 
of Europe's economic strain is most likely to oc- 
cur four or five years after the war is over. 

Which of the nations will suffer most in this 
economic reckoning ? How will the economic 
status, relative and actual, of the principal bellig- 
erents be affected by the war ? When Europe at 
last emerges from the tornado of bloodshed and 
destruction, shall we have before us the same 
economic world as we had in July, 1914, its con- 
stituent nationalities occupying the same respec- 
tive positions as before, and developing their re- 
spective energies on the same lines as before; or 
shall we presently discover that economic positions 
and relationships of the world have been changed 
fundamentally, and that a different economic era 
has begun ? These are questions of curious, 
though as yet little more than speculative, in- 
terest. 

How the various nations were ranged in the 
economic order, when this war broke out, every 



202 THE ECONOMIC AFTERMATH 

one knows. England was still indisputably the 
world's financial and commercial centre. Ger- 
many had become an aggressive competitor, 
however, in the field of home production and 
foreign trade — so successful a competitor, indeed, 
as to reduce to outright effrontery Berlin's habit- 
ual allegation that this war was necessary to "get 
a place in the sim" and "obtain the freedom of 
the seas." France, until the shadow of impending 
war paralyzed financial confidence, had gained 
through her people's thrift and her bankers' con- 
servatism a prestige in the world's economic sys- 
tem probably higher than at any time in the pre- 
ceding century. Paris had in fact financed even 
the London money market during the acute strain 
of the Boer War period; had provided Russia 
with the financial sinews of war for the Man- 
churian campaigns; had helped out New York 
(through very large purchases of our new secur- 
ities) in a troublesome situation as recently as 
1910, and had actually been lending enormous 
sums to Germany's financiers and merchants, 
when the menacing attitude of the German Gov- 
ernment, at Morocco in 191 1, forced as an or- 
dinary precaution recall of practically all such 
credits. 

The United States was more of an economic 
puzzle. Its economic prestige in the world at 
large, immediately after 1898, was undoubtedly 



NEW YORK VERSUS LONDON 203 

enormous. Having purchased $200,000,000 of 
England's Boer War loans direct from the British 
exchequer after 1899 — a then im.precedented oc- 
currence — and having reached, two years later, a 
pinnacle of financial power which seemed unprece- 
dented, our markets listened in 1901 to the Wall 
Street prediction that New York was about to 
dispute the world's financial primacy with Lon- 
don. 

How premature, if not permanently illusory, 
were such expectations, we learned four or five 
years later, when, to sustain the structure of 
American speculation, oiur market's outright bor- 
rowing from Europe rose to the hundreds of mil- 
lions ; when our financial community was stretched 
flat on its back in the panic of 1907, and when we 
seemed, during the three ensuing years, to be 
chiefly occupied in enlisting European capital to 
help float new railway securities which our home 
investors did not show willingness or ability to 
absorb. But in what position, actual or relative, 
shall we and the other great states emerge from 
the epoch-making changes of this war? Of the 
three belligerents hitherto foremost in financial 
prestige, it is undoubtedly the prevalent impres- 
sion that France has given the greatest indication 
of weakened economic power. For more than a 
year, her government did not venture to provide 
for war expenses through important single nego- 



204 THE ECONOMIC AFTERMATH 

tiations of long-term loans. A short-term loan, 
offered in New York on highly favorable terms to 
the investor, fell far short of success. 

A large proportion of the war expenditure was 
met, as we have seen, through borrowings by the 
government from the Bank of France. These 
signs of economic weakness are the more impres- 
sive in view of the economic position of France 
during the past three decades. The change to 
her war-time situation is usually ascribed to the 
circumstances under which the war began — the 
invasion of France; the practical certainty that, 
but for Belgium and England, Paris would have 
fallen; the fact that one of the richest French 
industrial districts had been occupied by the Ger- 
mans since the first month of hostilities, and the 
well-known intimation of influential German 
statesmen, on numerous occasions since 1871, that 
the purpose of Germany, in another war, would be 
to insure the economic ruin of France. It is 
true that signs of impairment in French eco- 
nomic prestige had been pretty plainly visible, 
even before the fateful last week of July, 19 14. 
At a time, that year, when even the London 
Stock Exchange was dismissing as an absurdity 
the suggestion of a coming European war, the dis- 
turbance which had begun in European finance 
was commonly ascribed to the unfavorable con- 
dition of the Paris market, the hoarding of gold 



FUTURE OF FRANCE 205 

by the French people, and the virtual failure of a 
French public loan. But there is very good reason 
to ascribe even this to the growing timidity of 
capital, which, with the mysterious prescience of 
the money market, may instinctively have sus- 
pected after the ominous clash with Germany in 
191 1 that actual attack on France could not be 
long delayed. 

Be this as it may, we have yet to ask how 
France will emerge from the terrific economic 
strain of the present war. On that question we 
have some historical precedent to guide us. 
France, three times in the two past centuries, has 
been completely defeated and left in a state of 
seeming economic exhaustion — at the end of the 
long campaign of Louis XIV, at the final over- 
throw of Napoleon, and at the crushing climax of 
the Franco-Prussian conflict. In the first, her 
commercial predominance appeared to have had 
its coup de grace; in the second, her European 
empire disintegrated; in the third, a very impor- 
tant part of her own territory and an enormous 
ransom were exacted. Yet, after each of these 
experiences, the world witnessed the extraordinary 
spectacle of France promptly resuming her place 
in the economic system, and in the end display- 
ing a tangible economic power even greater than 
before. It is impossible that this should have 
occurred without the possession of national quali- 



2o6 THE ECONOMIC AFTERMATH 

ties and individual resources of which her enemies 
had failed to take account. Perhaps the peculiar 
character of the French people — their thrift, their 
imagination, their aptitude as arbiter of good form 
and good taste among the nations — explains this 
remarkable result. If so, it is difficult to imagine 
the France of the longer economic future occupy- 
ing in the economic system any different position 
than she has occupied in the past. 

What, then, shoiild the enormous strain of the 
present conflict forebode to Germany ? It is cer- 
tainly not true, as writers and correspondents 
have occasionally insisted, that Germany is al- 
ready "bankrupt." Yet the war has brought to 
financial and industrial Germany an experience 
to which no other powerful belligerent has been 
subjected. Germany's economic prestige of the 
three past decades has originated, first in her 
power to produce commodities at low cost and of 
desirable quality, next in her capture of the ocean 
trade through which these goods were brought to 
foreign markets. During more than two years the 
outlet for this production has been blocked; her 
commercial fleet has ceased to navigate the seas; 
the main source of Germany's recent economic 
prestige has literally dried up. "What we now 
manufacture," one of the foremost German news- 
papers declared in the early months of 1915, "is 
no longer the productive goods which meant new 



GERMANY'S OUTLOOK 207 

value and increasing national wealth. Now we 
produce only war material ; the work of our hands 
vanishes in air as powder and lead. We are using 
up our resources and capital." 

This has happened in a community whose ac- 
cumulation of capital as a nation has been an 
incident of our own times. Even in the half 
dozen years before the war began, Germany was 
a borrower of foreign capital, on an extensive 
scale, to conduct her domestic industries. The 
process did not mean poverty ; it might mean, and 
in Germany's case undoubtedly did mean, so 
rapid an increase in opportunities for profitable 
industrial expansion that foreign as well as do- 
mestic capital could be profitably used. But 
the war which has stopped abruptly this commer- 
cial activity and the resultant accumulation of 
new capital, is also depleting with immense rapid- 
ity the accumulations of the past. If we allow 
for the financial assistance granted by England to 
her continental allies, it cannot be doubted that 
the average daily war expenditure of Germany 
from her own resources has far exceeded that of 
any other government in the present conflict. 
The process of depletion, under these two sets of 
circumstances, must have been very rapid, even 
when disguised by the bold credit expedients of 
the government. Such an experience should lead 
to a period of very severe economic depression. 



2o8 THE ECONOMIC AFTERMATH 

Meantime, also, the phenomenon of currency de- 
preciation has appeared in Germany as in no 
other powerful continental state aside from Russia. 
Her government has been driven, first to formal 
suspension of specie redemption of its currency, 
then to the recourse of prohibiting, under penalty 
of fine and imprisonment, the bidding of a pre- 
mium on gold or the offering of the currency at 
a discount. 

Revolutionary France of 1789 resorted to the 
same expedients, yet rose to predominant political 
and financial power a few years later. But the 
conditions are not analogous; for the French 
economic revival, in the earlier years of the 
Napoleonic regime, was a sign of the orderly 
utilization of national resources which had never 
previously been touched, whereas Germany had 
so far exerted all the powers of scientific taxation, 
before her resources were subjected to the present 
strain, that the increase in the army during 1913 
(undoubtedly in preparation for this war) was 
accomplished only by imposing an extraordinary 
burden, described as the "property levy" or 
"contribution by property owners," on all the 
individual wealth of the Empire. A further dif- 
ficulty in forecasting Germany's power quickly to 
resume her old position in the race for economic 
leadership lies partly in the as yet not clearly 
determined question, how far the country's 



NATIONAL QUALITIES 209 

notable commercial expansion, since the Franco- 
Prussian War, was due to peculiar national qual- 
ities of industry, inventiveness, and energy, which 
other nations could not match, and how far to 
government favor or other artificial stimulus. 
The financial and industrial prestige of England 
has its roots in the habits and qualities of the 
people, as far back as Queen Elizabeth's reign. 
France displayed in the time of Louis XIV the 
commercial traits which insure her present 
position in the economic world. The natural re- 
sources and individual qualities which have 
achieved America's present position among the 
nations can be traced back at least a century in 
our history. 

But Germany is a newcomer; one may almost 
describe her as a made-to-order industrial state. 
Half a century ago, few people would have 
classed the German nation as a leading factor 
in the world of economic power and prestige. 
Hamburg, Frankfort, and Bremen, it is true, had 
even then a financial history almost as old, and 
fully as respectable, as that of Venice or London; 
but the entry of Germany as a whole into the field 
of world finance hardly antedates 1871. Her re- 
markable economic expansion, since that date, 
has taken chiefly the two forms of scientific pro- 
duction and of aggressive commercial develop- 
ment under government auspices. The intrusion 



2IO THE ECONOMIC AFTERMATH 

of German industry into the competitive field of 
the outside world, during the three or four 
past decades, foreshadowed in an extremely in- 
teresting way her methods of aggressive warfare. 
It is entirely probable that the "German effi- 
ciency" which has become proverbial in the his- 
tory of the war, may find equally vigorous ex- 
pression in the period of industrial recuperation 
which must come after the war. Yet the lack of 
accumulated capital resources at home, the loss 
of productive laborers in battle, the enormous 
burden of war-time indebtedness and the new 
taxation which must come after war is over, will 
be a peculiarly formidable handicap. Germany 
will have to meet, in a vastly greater degree than 
France, the problem of direct industrial and com- 
mercial competition with countries which will 
then be far more abundantly equipped with cap- 
ital for the purpose. 

One of those competitors, after as before the 
war, will naturally be England. The problem of 
the economic aftermath in England gains par- 
ticular interest from what has happened since the 
war began. It has hardly yet been possible for 
the world to realize the stupendous loss in eco- 
nomic prestige which London has already suffered. 
In continental Europe, the things which have 
happened to its financial and commercial machin- 
ery since July, 191 4— the moratorium, the closing 



ENGLAND'S PROBLEM 211 

of the exchanges, the suspension of gold pay- 
ments, the recourse to paper currency — had hap- 
pened before in those communities. But to Eng- 
land the proclamation of a moratoritim on debts 
in August, 1 9 14, the closing of the stock exchange, 
and the issue of special government paper money, 
were new and startling occurrences, not only in 
our generation, but in English financial history 
since the modem credit system was established. 

Not even during the eighteen years of the ex- 
hausting Napoleonic War, did financial London 
resort to any of these expedients. It is true, as 
I have already recalled, that a great depreciation 
of sterling exchange occurred in the Napoleonic 
period on such foreign markets as Amsterdam 
and Hamburg, and an actual premium on gold at 
home occurred in the Napoleonic wars. But 
London had then no rival to dispute its finan- 
cial primacy; and even so, it was six years after 
the final fall of Napoleon before the Bank of Eng- 
land was able to resume gold payments. Still 
more significant has been the voluntary abdica- 
tion by London, for the period of war, of its place 
as the world's financial centre. 

In the case of no other belligerent, therefore, 
does the problem of economic after-effects of this 
present war present more dramatic historical 
possibilities. The world began to ask in 191 5 if 
the sceptre of financial leadership might not turn 



212 THE ECONOMIC AFTERMATH 

out to have passed permanently from the hands 
of London; and the astonishing depreciation of 
exchange rates on that market encouraged the 
idea. Lombard Street itself, depressed and be- 
wildered as it was at the all but unimaginable 
succession of events already on the record, be- 
lieved nothing of the sort. It was entirely con- 
fident that both the commercial and the financial 
prestige of Great Britain will be resumed when 
the war is over; that London will again be the im- 
disputed money centre of the world. This con- 
fident expectation had its basis in three facts. 
Nothing had occurred to drive English commerce 
from the seas. However much England's ac- 
cumulated stock of capital may be reduced by the 
prodigious waste of war, the proportionate reduc- 
tion, in the case of her European competitors in 
finance and trade, will have been vastly greater. 
The United States, with development of its own 
resources certain to absorb the greater part of its 
own accruing capital, cannot for years to come 
be fitted economically for the world's central 
money market. 

There is force in all three arguments; they are 
reasonably convincing as to the general question 
of the ''money centre." On the other hand, only 
the test of the aftermath of war can show just 
what are to be the logical results of that loss in 
economic prestige which the English financial 



WORLD'S MONEY CENTRE 213 

market has had to sustain. It is yet to be deter- 
mined how much of London's past financial power 
was due to the supposed invulnerability of the 
English financial system to any kind of shock. 
Resale to American markets of more than 
$1,500,000,000 worth of the American securities 
held by English investors — perhaps one-third of 
all that was owned when war began — marked the 
visible surrender of one highly important factor 
in the country's prestige as the financial and eco- 
nomic centre of the world. It is at least a safe 
prediction that when the war is ended England 
cannot regain overnight, so to speak, the position 
which she lost as a consequence of the economic 
vicissitudes of 19 14. It is an easy possibility that 
New York will retain many of its war-time func- 
tions and responsibilities as the central money 
market for the Western hemisphere. 

Beyond that possibility, the predictions of peo- 
ple familiar with the world's economic machinery 
and economic history are extremely guarded. 
Undoubtedly, England's primacy has been an out- 
growth of her financial system's long unchallenged 
soundness — which is now, perhaps, in a way im- 
paired. But it is also an outgrowth of her position 
as the workshop for other nations; of the fact 
that both her productive facilities and her ac- 
cumulated capital have for centuries exceeded 
home requirements; of her free trade with all 



214 THE ECONOMIC AFTERMATH 

the outside world, and of the world-wide pre- 
dominance of her merchant fleet. 

Granting that on this occasion the American 
financial system will emerge from the war-time 
period with a prestige superior to that of England 
— as attested by the depreciation on the exchange 
market, in terms of American money, of the cur- 
rencies of all the greatest states of Europe, includ- 
ing England — this country would still hardly 
duplicate England's position as regards the other 
attributes. We shall not be, as England of neces- 
sity is, primarily the workshop of the outside 
world. A vast field of home development still 
awaits our manufactiuing output and our capital. 
We have not dared, and probably shall not dare 
for many years to come, to try the experiment of 
free trade. Our legislators have shown no dis- 
position to free the American merchant marine 
from the fetters which have held it back from free 
competitive expansion. 

The question of future financial relationships 
between the European Powers which went to 
war in 1914, brings up other considerations. Pre- 
dictions were publicly made by European states- 
men,, almost from the beginning of the war, that 
those relationships would be settled on the basis 
of political rancor and resentment. "On the 
columns of the British Empire," the German 
finance minister declared to the Reichstag, De- 



FINANCIAL ENMITIES 215 

cember 15, 191 5, at the end of an impassioned 
denunciation of England, "are written in glowing 
letters the same words as were written on the wall 
of Belshazzar's palace," This declaration, some- 
what rhetorical for a sober and practical bank 
director, meant on its face that Germany expected 
to break down Great Britain's colonial system, 
after if not during the war. "So far as commerce 
is concerned," the president of the British Board 
of Trade retorted, in an equally bitter speech to 
Parliament a week later, "Germany is a beaten 
nation, and it is for us to see that she does not 
recover." 

There seemed to be little ground for taking 
seriously either of these emotional assertions. 
So far from the British Empire showing signs of 
political or economic disruption, the history of 
the war has indicated on the one hand, that Eng- 
land's colonial possessions had been drawn in un- 
precedented loyalty to the mother country, and 
on the other hand, that England's protection of 
the ocean trade of her colonies has never in his- 
tory been so powerfully asserted as in this great 
war. That trade with Germany may to a certain 
extent be discountenanced in the immediate 
aftermath of the conflict, by the people now at 
war with her, is not impossible. There may be 
exclusive and preferential tariff alliances, and, in 
any case, Germany will have a long account to 



2i6 THE ECONOMIC AFTERMATH 

settle for her part in provoking this war and her 
manner of conducting it. Belgium, the Lusitania, 
the "air raids," the conspiracy against neutral 
munitions factories — are episodes which will at 
least not help the vogue of goods with the label 
"Made in Germany." 

Still, the advantages of trade between nations 
are reciprocal. England, for instance, exported 
in the last full year of peace $300,000,000 of mer- 
chandise to Germany, of which $203,000,000 was 
British produce, and the shrinkage in Great 
Britain's outward trade, during the period of 
war, resulted to a not at all inconsiderable extent 
from the embargo on trade with Germany. A 
correspondent of the London Economist, writing 
in a reminiscent vein, lately recalled that when 
the Franco-Prussian War was visibly near its end 
in 1 87 1, "French and German commercial trav- 
ellers were waiting on the frontiers for the mo- 
ment when peace should be signed, and there was 
a great inrush for orders, into both France and 
Germany, as soon as peace was declared." The 
world's past experience, at all events, points to 
the conclusion that future financial and business 
relations of the great countries of the world will 
not be permanently determined by the hatreds 
and revengefulness arising from the war. 

Such doubt as has actually arisen, during and 
since the above-cited declarations of 1915, based 



TWO OPPOSITE CONCLUSIONS 217 

itself on the question whether the analogies of 
former wars — the subsequent political and eco- 
nomic rapprochement of the antagonists of the 
Napoleonic wars, of our own Civil War, and, to a 
large extent, even of the Franco-Prussian War — 
could safely be assumed in the present conflict. 
The theory of statesmen and writers who answer 
in the negative has been that the breach has been 
too wide, the just indignation over the wicked 
provocation of this war too intense, the resent- 
ment at Germany's violation of rules of war and 
dictates of humanity too profound, to make even 
economic reconciliation possible. This feeling 
was no doubt rendered more intense because of 
the prevalent beUef that on this occasion, in a 
degree perhaps unprecedented in the history of 
war, the problem of financial and economic re- 
construction must underlie that of political read- 
justment. Nothing could better illustrate the 
formidable part which it may be destined to play 
than the fact that while the Hps of statesmen 
were sealed regarding the political and territorial 
aftermath of war, the Allied Powers came volun- 
tarily into the open with a plain and definite dec- 
laration of the most extraordinary sort, regarding 
their purposes as to economic relations with the 
present enemy on return of peace. 

This declaration was made public as a result 
of the so-called "Economic Conference" of June 



21 8 THE ECONOMIC AFTERMATH 

17, 1916, at Paris, to which delegates were sent 
by all of the Allied governments. It set forth, in 
considerable detail, the general programme which 
the delegates recommended to their several gov- 
ernments in regard to economic relations with 
the enemy, first during the actual period of war, 
next during the period of post-bellum reconstruc- 
tion, and finally during the permanent period of 
peace. The first pledge of the Allied delegates 
was rightful and magnanimous. Needs of those 
countries which have been "victims of destruc- 
tion, spoliation, and abusive requisition" should 
be recognized at the start, with the view of re- 
storing "to such countries as a special privilege" 
their ruined or sequestered "raw material, in- 
dustrial and agricultural machinery, live stock, 
and merchant marine." 

This promise to unhappy Belgium, Servia, and 
Poland was in line with the highest motives that 
prevailed, first in Russia's challenge to Austria's 
reckless behavior regarding Servia, and again in 
England's entry into war when Germany invaded 
and plundered Belgium. It was not the less 
honorable to its authors in that it had no word to 
say of an indemnity to be paid by Germany to 
Belgium — a penalty merited on the face of things, 
as no other similar penalty in history has been 
merited, by the brutal cynicism with which the 
German Government trampled on treaties of neu- 



AT THE PARIS CONFERENCE 219 

trality, violated international pledges regarding 
conduct of modern war, and extorted blood-money 
tribute in the millions from non-resisting Belgian 
towns, at the very moment when only the gen- 
erosity of neutrals was preserving the Belgian 
people from starvation. 

But this was not the really noteworthy part of 
the Allies' economic programme. In general, the 
proposals (tentative in so far as they had to await 
approval of home administrations and legisla- 
tures) seemed to be directed toward the blocking 
of any effort by the Teutonic Powers after war to 
gain possession, for their own production and ex- 
port trade, of the markets of their present enemies. 
The declaration left it more or less a matter of 
conjecture how far the programme was offensive 
and how far defensive. Measures were to be 
taken which would "assure the independence of 
the Allies" in matters touching "financial, com- 
mercial, and maritime organization." The con- 
tracting governments were "resolved to take 
without delay the necessary measiu-es to rid them- 
selves of dependence on enemy countries as re- 
gards raw material and manufactured articles 
which are essential to the normal development of 
their economic activity." This would apparently 
indicate merely a form of protection to home in- 
dustries — at least so far as concerned exclusion of, 
or discrimination against, importations from Ger- 



220 THE ECONOMIC AFTERMATH 

many or Austria. A considerably longer step was 
suggested by the statement that, in the period of 
economic reconstruction, and in order to protect 
their commerce and industries "against an eco- 
nomic depression resulting from 'dumping' or 
against any other unfair method of competition," 
a period should be fixed by the Allies "during 
which the commerce of the enemy Powers shall be 
subjected either to prohibition or to a special 
system which shall be efficacious." 

Even this proposal was restricted to the period 
of transition from abnormal war conditions to 
the normal state of peace; but the next looked to 
the longer future. Among what were designated 
as "permanent measures of mutual aid and col- 
laboration" it was stated that the present Allied 
governments "may have recourse to subsidized 
enterprises under the direction or control of the 
governments," or to "payment to encourage 
scientific and technical researches," or even to 
"permanent prohibitions." Finally, as to future 
relations of the Allied Powers with one another, 
the conference declared itself united "in pre- 
serving for the Allied countries, in preference to 
all others, their natural resources during the period 
of commercial, industrial, agricultural, and mari- 
time reconstruction," and agreed for that purpose 
"to establish special arrangements which will 
facilitate an exchange of resources." 



MOTIVES OF THE ALLIES 221 

No series of proposals quite like this had ever 
before been formulated, either during war or in 
sequence to it. The declaration at once called 
forth comment as widely divergent in interpre- 
tation as in criticism. By some European critics, 
it was assumed that the programme was urged 
primarily by the continental Allies — Russia and 
Italy in particular — who wished to be guaranteed 
against falling again under Germany's financial 
and commercial domination. But there were 
also intimations that the programme only formu- 
lated the British ministerial assertion of the year 
before that "so far as commerce is concerned, 
Germany is a beaten nation, and it is for us to 
see that she does not recover." Against this 
second theory, the Paris proposals were defended 
as the erecting of a necessary safeguard against 
the commercial chaos pictured as a result of Ger- 
many's desperate economic situation after war. 
From yet another point of view, it was alleged 
that England's proposed participation in this 
sweeping protective policy embodied a clever 
move by Bonar Law and his English "Tariff Re- 
formers" to fasten on England, in the stress of 
war, a tariff system which English voters had 
steadfastly rejected in time of peace. Even at 
Washington, the Paris declaration elicited the 
pointed inquiry whether or not the pledge of the 
Allies, to preserve by mutual arrangement the 



222 THE ECONOMIC AFTEKMATH 

resources of their countries "in preference to all 
others," pointed to discrimination against the 
United States. 

On the whole, the impression made in neutral 
communities was that the whole procedure reflected 
not reasoned conviction based on experience, but 
the vague apprehension — arising from uncertainty 
as to what will actually be the world's economic 
or political situation when war is over — which 
has colored even our people's judgment as to their 
own country's situation on return of peace. When 
experienced statesmen and thinkers were refusing 
to risk prediction of the economic sequel to this 
war, no one need have wondered at panicky de- 
mands to prepare for anything. The compact to 
resist the imagined inroads of commercial Ger- 
many, after return of peace in Europe, is at least 
as logical as the demand for an American army 
large enough to resist her imagined military in- 
roads. The two suppositions are indeed not at all 
dissimilar; for whereas the one would seem to 
look for unprecedented military aggression from 
a nation with shattered army and depleted popu- 
lation, the other assumed an equally unprec- 
edented commercial competition from a country 
stripped of raw material, denuded of surplus cap- 
ital, drained of its able-bodied laborers, and sad- 
dled with a depreciated currency. 

All such considerations were left to get a hear- 



OPPOSING CONSIDERATIONS 223 

ing, when the declaration of the Paris conference 
should come up for debate before the legislative 
bodies. But in the meantime, outside observers 
recognized three aspects of the matter which had 
apparently received scant consideration from the 
delegates at Paris. In so far as the proposed 
agreements were defensive, not offensive, they 
would amount to confessing fear of the very nation 
which (supposing the defeat of Germany) had 
just been conquered. That attitude would at 
least be novel and anomalous for a victorious 
coalition. In so far as they were offensive and not 
defensive, they would be public declaration of 
economic war, to be made a source of future bit- 
terness, acrimony, and renewed political intrigue, 
at the very moment when the disastrous military 
war had been happily concluded. 

But in the third place, it was difficult to deny 
that, while what England, France, Italy, and 
Russia would gain from exclusion of German 
trade would be highly problematical, what they 
would lose would be certain. Back of all questions 
of "dumping," "commercial invasion," and "bal- 
ance of trade" stood the quite undeniable fact 
that Germany, with her thrifty population and 
her enormous import requirements, will continue 
to be one of the most profitable markets in the 
world. It will hardly be supposed that exclusion, 
partial or complete, of German products from the 



224 THE ECONOMIC AFTERMATH 

Allied markets, would not provoke retaliation in 
kind on the part of Germany. But if so, then the 
upshot of such attempts to obstruct by arbitrary 
edict the normal movement of commercial inter- 
course would necessarily be to transfer such op- 
portunities, in the rich field of Germany's foreign 
trade, to neutral markets which were already 
threatening Great Britain's commercial suprem- 
acy. A decision of the Allied countries to dispense 
with German goods would quite as inevitably 
compel their own recourse to the American pro- 
ducers on a scale of exceptional magnitude. Even 
if, under such conditions, English and German 
exporters should endeavor to find in the American 
market compensation for their loss of Anglo- 
German trade, the salient fact would be the fur- 
ther immense advance in commercial prestige by 
the United States — at the expense of the Euro- 
pean markets, yet by the deliberate act of the 
European Powers. 

It was not easy to imagine England, at any 
rate, embarking on so suicidal a commercial policy. 
When all the surrounding circumstances were 
considered, it seemed far more reasonable to sup- 
pose that the English delegates, at any rate, 
indorsed the Paris proposals as in the nature of a 
threat to Germany of what might happen if her 
government did not presently come to terms and 
end the war. The military policies of the Hohen- 



TEACHINGS OF HISTORY 225 

zollems had more than once been halted or di- 
verted by pressure from the commercial interests 
of the Empire. But this whole question, like the 
multitude of other uncertainties created during 
the progress of the war, was bound to remain in 
the realm of conjecture and dispute until the 
actual hour of international readjustment should 
arrive. 

It is conceivable that the bitterest animosities 
of this war will survive into future generations; 
yet that is not altogether the teaching of the past. 
Thackeray's celebrated "Waterloo chapter" con- 
cluded with a prediction of indefinitely continued 
political enmity between France and England; 
but the only two subsequent wars in which both 
have been engaged have seen their armies fight- 
ing side by side against a common antagonist. 
When the reader of history recalls the. Prussian 
commander's insistence after Waterloo, that Na- 
poleon be put to death by the victorious Allies, 
or the demand for the South 's political subjugation 
after the Confederate armies had surrendered, or 
the declaration by the London Times in 18 14 
(when even the British ministry was planning to 
settle our "War of 1812 "), that "to be consistent 
with ourselves, we must maintain the doctrine of 
'No Peace with James Madison,' " he will at 
least be compelled to acknowledge that the last 
stages of a bitter and angry conflict are not the 



226 THE ECONOMIC AFTERMATH 

hour when the clearest views of future relation- 
ships may be obtained. 

No doubt, it was a changed France with which 
reconciliation became possible to England; a 
"New South" which opened the way to the Union 
as this generation knows it, and an altered Eng- 
land whose present relations with the United 
States have replaced the underlying animosity 
which the Revolutionary War and the War of 
1812 left behind them. But this means that if 
we read by the analogy of history, it will be another 
and a different Germany with which other nations 
will reconstruct relationships in the longer future. 



CHAPTER XII 

EUROPE AND AMERICA 

PERHAPS it was the very brilliancy of the 
economic fortune, brought by the war to 
the United States, which served to intensify 
misgiving as to this country's possible situation 
when the war ends. Even in speeches and con- 
vention declarations of the presidential campaign 
in 1 91 6, reference was constantly made to the 
"temporary" character of our war-time prosper- 
ity. That some essential elements in this sudden 
prosperity would not outlast the war, nobody de- 
nied. We could expect no more $2,000,000,000 
"excess of exports." Our huge outward trade 
in war material of every sort was bound to end 
on return of peace. Prices for metals and com- 
modities indispensable to war were certain to 
come down from their extravagant heights. Prof- 
its of the shipping trade — which, with the driving 
of Germany's merchant marine from the sea and 
the drafting of England's into war service, added 
500 or 1,000 per cent to freight rates — will be 
subject to extensive and perhaps early readjust- 
ment. To what extent the ending of the war, 

227 



228 EUROPE AND AMERICA 

and the release of Eiirope's fleets for peaceful 
commerce, would affect our war-time activities 
in trade with South America and Asia, was at 
least a problem to be considered. 

There were considerations on the other side. 
Many American industries, cramped for lack of 
their accustomed raw materials, would be in- 
stantly benefited by the ending of the war block- 
ades. The foreign market for our cotton, so largely 
cut off by the war as to compel reduction of more 
than 20 per cent in the annual American crop, 
would be completely reopened. But behind all 
these generally recognized probabilities there re- 
mained one great uncertainty; which, as time 
went on, occupied more of the American business 
community's attention. That was the question 
whether Europe — its people impoverished by 
war, its manufacturers suddenly deprived of de- 
mands for war material, and, in Germany's case, 
its whole productive industry in touch again 
with a foreign market lost since the war began — 
will not instantly pour into the rich United States 
so immense a mass of manufactured goods, offered 
at very low prices fixed by the urgent needs of the 
European producer, as to cut off our own manu- 
facturers from the market. This picture seemed 
on its face convincing; the result appeared to 
follow the logic of the situation. Our own govern- 
ment has already begun tentatively to discuss 



FEELING AS TO THE WAR 229 

measures which might be necessary to avert or 
modify the disorganizing effect on American in- 
dustry. Platforms of both poHtical parties, as 
adopted for the presidential campaign of 1916, 
recognized such an economic sequel to the Euro- 
pean War as an imminent possibility. 

Many of the circumstances of the day conspired 
to emphasize such misgivings. The extraordinary 
situation which, with the prolongation of the war, 
had arisen throughout the world; the increasing 
jeopardy to which (as at the similar jimcture of 
the Napoleonic wars) the rights of neutral states 
and people were subjected; the rising emphasis 
and bitterness which marked, on the one hand, the 
feelings of the belligerents toward one another, 
and, on the other hand, the sympathies of neu- 
trals — all these found expression in the financial 
as in the political incidents of the day. It is rea- 
sonably safe to say that nowhere did they influ- 
ence news and tinge controversy as in the United 
States. Our State Department's attitude, the 
momentary clash of the President with Congress 
over the "submarine dispute" with Germany, the 
tense public excitement over the battle news, and 
the recourse to public meetings convened to urge 
one policy or another, clearly enough reflected 
these aspects of the situation. So, also, the re- 
peated agitation and disorder on the stock ex- 
change have reflected them; it has been a very 



230 EUROPE AND AMERICA 

different picture, since 1916 began, from the un- 
bounded confidence of 191 5, when the eyes of 
Wall Street were fixed almost exclusively on this 
country's own prosperity. The spread of the po- 
litical and popular movement for "preparedness" 
was a natural outcome of the surrounding influ- 
ences. 

For the sudden vogue of the "military pre- 
paredness" propaganda, there seemed, in the view 
of the ordinary calm observer, to be several dif- 
ferent causes. One, and imdoubtedly the most 
convincing, was the belief that for actual defensive 
purposes, our land forces were not such as to 
admit either of immediate effective resistance or 
of rapid expansion into an armament which would 
be effective. This consideration, to be sure, was 
of itself no more true ini9i5orini9i6 than it was 
ten years ago, or a quarter of a century ago. Par- 
ticular incidents of the European War, however, 
had instilled into the minds of many people the 
further idea that things may happen in this world 
of ours whose occurrence we supposed, as recently 
as the middle of 1914, to be wholly inconceivable. 
This could not fail to be a powerful secondary 
influence in the "preparedness" discussion. 

Yet no one can have missed the third influence : 
the presence in the United States (and elsewhere 
throughout the world) of an emotional hysteria, 
engendered in very infectious form by the contro- 



" PREPAREDNESS " 23 1 

versies of the war. It has not been easy for any 
individual to keep himself in hand, so to speak, 
during this clash of strong emotions — ^which, as 
a matter of fact, could not possibly be avoided, 
even in the every-day conversation of the office, 
the club, or the dining-table. Coming on top of 
the actual events of the present war, this violence 
of feeling, and the inevitable resultant extrava- 
gance of inference, rendered peculiarly difficult 
the sane and sober discussion of problems of na- 
tional defense. 

In many respects, it was these same three in- 
fluences which aroused discussion over what has 
received the imitative title of "economic prepared- 
ness" — ^meaning the adjustment of our financial 
machinery and business methods to whatever con- 
ditions may be expected to prevail after the war. 
Fortunately for the usefulness of the discussion, 
it was not conducted on the emotional pitch which 
frequently characterizes the "military prepared- 
ness" propaganda. In the field of world-politics, 
the imexpected events which have occurred since 
the war began might be construed into a ground 
for misgiving as to oiu* own country's position. 
But the unexpected financial events in our coun- 
try's trade, finance, and industry, were almost 
wholly of a character to reassure the American 
mind. Beyond even this, the questions with which 
the economic problem had to deal were severely 



232 EUROPE AND AMERICA 

practical, and have to be judged by practical ex- 
perience — ^in which they differ considerably from 
discussions based on the hypothetical possibility 
of invasion of the United States by the German 
army. 

For one instance, the very familiar and very 
much overworked assertion that, at the end of 
the war, the United States would be left without 
a friend in the world, did not greatly impress the 
practical financial mind. The man of some ex- 
perience in affairs, whether at home or internation- 
ally, does not expect that a neutral state, lifted 
to high individual prosperity by the incidents of 
a foreign war, will be regarded with the kindest of 
feelings by belligerent nations struggling under 
the burden of the conflict. Though it is not the 
neutral's fault, he is certainly gaining where they 
are losing. 

The practical man remembers, if he is familiar 
with history, that France and England looked 
with by no means unconcealed irritation at the 
"business boom" in this country during the early 
years of the Napoleonic wars, and that the Con- 
tinent had much the same feeling with regard to 
England during 1870 and 1871. But the notion 
that, whatever might be the individual sympathies 
of our people in the European War, every one of 
the European belligerents had come to hate the 
United States, and would be its enemy hereafter 



ECONOMIC INVASION 233 

because our government, as a government, had 
not departed from its neutrality and openly- 
favored one side or the other, could not fail to 
appeal to intelligent and thoughtful men as a 
wild absurdity. The slightest reflection on the 
facts of the situation, as the end of the war drew 
nearer, would convince him that the financial and 
political friendship of the United States was cer- 
tain to be the great prize for which Europe would 
contend. 

Still, it was a curious fact that the practical 
business man, who rejected out of hand the fore- 
cast of an isolated and friendless post-bellum 
America, began his own "preparedness" discus- 
sion with the talk of possible invasion. What he 
meant, however, was the "dumping" of low-priced 
European merchandise in this coimtry when the 
war was over; the "flooding of the American 
market" with competitive goods; the "economic 
invasion." Now, invasion of this sort is not a 
new source of misgiving, even in the minds of 
statesmen. A quarter of a century ago, not only 
America but Europe was anxiously discussing a 
prospective invasion by Asiatic merchandise. 
When England and the Continent then talked of 
the "yellow peril," they did not at all mean im- 
migration from China and Japan, but products 
of Chinese and Japanese manufacture. It was 
less than two decades ago when the minister of 



234 EUROPE AND AMERICA 

foreign affairs in a European cabinet, addressing 
the legislative body, declared that "European 
nations must close their ranks and fight shoulder 
to shoulder" if "the vital interests of the Euro- 
pean people are not to be gravely compromised," 
and by nothing less than the threatened invasion 
of American manufactures. 

The fright to which Count Goluchowski's 
speech gave expression — at a time when American 
manufacturers, emerging from the panic of 1893, 
were setting forth to discover in the export trade 
an outlet which the depressed home market did 
not offer — disappeared when reviving prosperity 
in the United States itself relieved the pressure. 
A few months, and the "American peril" was as 
completely forgotten as the "yellow peril," and 
the fact may not be without bearing on the pres- 
ent controversy. Yet the incident suggests anal- 
ogies in both directions. The present belligerent 
states of Europe will at least repeat, after the 
war, the case of a depressed home market, and the 
United States will repeat the case of an inviting 
objective point for export trade. Is it our busi- 
ness, then, to begin by raising higher and higher 
protective tariffs in advance of the post-bellum 
"European invasion" ? 

The question might be argued on the basis of 
this country's ambition to retain its present place 
as the central money market of the world. On 



QUESTIONS OF POLICY 235 

that ground alone, the proposal to begin our 
career in economic primacy by protecting our own 
markets against competing foreign nations is a 
bit anomalous. London's economic primacy of 
our day was built up on the absolute free-trade 
policy of England. There are those who believe 
that the exigencies of war expenditure are al- 
ready driving England to the familiar "revenue 
tariff with incidental protection," and our own 
national experience teaches that such a tariff is 
a stepping-stone to a protective tariff with in- 
cidental revenue. Hypothetically, and as a pure 
matter of economic strategy, one might suppose 
that the sceptre of world finance might most 
surely be grasped by seizing also the weapon with 
which England won it. 

Governmental policies are not always settled 
nowadays, however, on the basis of general prin- 
ciples. The question must still be answered, 
whether America will not be "flooded with cheap 
Etuopean merchandise" after the war, and to 
answer it we have no precedent to guide us. It is 
true that, in the year when the long Napoleonic 
conflict in Europe came to an end, this country's 
merchandise imports rose to $113,000,000, as 
against $12,900,000 the year before; and that the 
next year they broke all precedent. But the 
United States had itself been at war with a Euro- 
pean Power, from 181 2 to the end of 1814. The 



236 EUROPE AND AMERICA 

sudden inrush of imported English merchandise, 
on return of peace, was not then described as an 
industrial calamity, but as trade revival. The 
goods were sorely needed ; their arrival in our 
markets foreshadowed business activity and re- 
turn of better times. Nevertheless, England un- 
doubtedly began then to undersell the outside 
producing world. Why will not both England 
and continental Europe, when this war ends, set 
to work at the same task in order to relieve their 
own economic biirden ? 

The lesson of the world's experience, thus far 
in the war, has been that confident prophecy of 
results from the powerfiil economic causes, visibly 
at work, is rash. But that same experience has 
also shown, as we have seen repeatedly in our nar- 
rative, that prediction has been most imlucky 
when it arose from impulsive expectation of the 
worst, and when it was based on assumption that 
the most alarming economic incidents of older 
wars were boimd to be repeated. Keeping in 
mind these reservations, the first answer to be 
made to the above-stated question is, that the 
particular conditions which prevailed in the after- 
math of Waterloo can hardly be duplicated. In 
the dozen years after 181 5, the economic history 
of Europe was a tale of production with labor at 
starvation wages. Tooke, the economic his- 
torian of the period, describes the interval from 



A CENTURY AGO 237 

1 814 to 1 81 6 as one of "losses and failures among 
the agricultural and commercial and manufactur- 
ing and mining and shipping and building inter- 
ests, which marked that period as one of most 
extensive suffering and distress." Readers of 
"Tom Brown" will remember the narrative of 
the English parish "which had risen into a large 
town during the war, and upon which the hard 
years which followed had fallen with a fearfiil 
weight"; "masters reducing their estabHshments, 
the fearful struggle between the employers and 
men; the lowering of wages." The memoirs, the 
histories, even the fiction of the period, are crowded 
with such dismal facts. 

The hard times in Europe will follow this war 
as they followed that of a century ago; but it is 
far from being an equal probability that cheap 
European labor, which was the basis of such "eco- 
nomic invasion" as occurred after 181 5, will be a 
sequel to this war. It was England which, in the 
vernacular of to-day, "flooded the world's mar- 
kets" with low-priced manufactures. But Eng- 
land's labor supply had not then been depleted 
through a continuous, violent, and destructive 
conflict on the land. The British army's losses in 
Wellington's Spanish campaign, even if added to 
the losses at Waterloo, would hardly match the 
English losses in a single month on the present 
Western front. 



238 EUROPE AND AMERICA 

With her present loss of available laborers, and 
with even women's work in factories largely a 
temporary expedient of war, the natural outcome, 
all other influences remaining equal, woiild be that 
employers must bid for labor. All other influences 
may not be equal ; it is possible that, in the period 
of financial exhaustion after war, the home de- 
mand for goods will be as much reduced as the 
supply of labor. Yet, as against even this con- 
tingency, there remains the unmistakable fact 
that the Labor party, even in this time of war, 
has held the balance of power in the English 
Parliament, and that, immediately prior to the 
war, it was dictating minimum wages, through the 
ministry and Parliament. 

But this is not the only consideration bearing 
on the economic sequel. It is recognized, even in 
the programme of economic policy adopted by 
the Allies in 1916, that the first necessity of con- 
tinental Europe after peace will be immense sup- 
plies of new material for reconstruction of its 
shattered cities, damaged railways, bridges, har- 
bors and fortifications, and overworked industrial 
establishments. To provide this new material, it 
will find itself with factories whose machinery 
has been altered to make guns and ammunition, 
and with the supply of able-bodied laborers enor- 
mously reduced by loss in battle. Demands on 
Europe's productive energies for the purpose will 



LABOR CONDITIONS AFTER WAR 239 

be very great ; some of our own most experienced 
manufacturing authorities hold that the circum- 
stances insure an export trade from the United 
States to Europe, after war is over, of abnormally 
large proportions. It has been publicly stated, 
by high authority in Germany's productive in- 
dustry, that a year and a half, after return of 
peace, will be required "merely to resupply our 
countries with the things that have been used up 
during the war." 

In the early part of 19 16, the Associated Press 
correspondent at Berlin interviewed numerous 
high authorities in German industry on the ques- 
tion, how the German people would be able to 
bear the heavy burden of taxation, recognized as 
an inevitable sequel to the war. The director- 
general of the great Siemens- Halske electrical 
company replied that the burden would be offset 
by increased wages. "To-day in Germany," he 
declared, "wages are unprecedentedly high, and 
the return of a few million soldier-workmen will 
not drive them down." A director of the largest 
private bank in Germany went further, stating it 
as his opinion that the "heavy taxation following 
the war will necessitate general advance in both 
salaries and wages"; a prediction supplemented 
by a high economic expert with the remark that 
if the employers will not voluntarily raise wages, 
then the advance "must be forced by those who 



240 EUROPE AND AMERICA 

need it." But higher wages are not the road to 
cheap competitive production. 

As for France and Russia, the task of preparing 
for large purchases from the United States when 
war is over — especially of mechanical appliances 
for use in agriculture and other productive indus- 
try, has long been under way in its preliminary 
stages. A careful review of the matter by a well- 
informed Paris correspondent, at the time, con- 
cluded that in France, during the period immedi- 
ately following return of peace, there will be 
"no chance for either plentiful or cheap labor for 
surplus production," and that "for some time 
after war, demands on the United States, so far 
as France is concerned, will be quite as large and 
quite as lu-gent as during the war itself." This 
view of the question was publicly confirmed by 
members of a commission, sent from France as 
official representatives of the French Government 
and the various French industries, with the an- 
nounced purpose of ascertaining how the needs of 
industrial France, in the period of reconstruction 
after war, could best be met from the manufac- 
turing facilities of this country. Members of this 
commission estimated that, for machinery alone, 
the new orders of this nature might reach $i6o,- 
000,000. 

These aspects of the European situation in 
regard to labor supply, wage scales, and capacity 



PROBLEMS OF THE FUTURE 241 

for production, may not finally determine the 
nature of transatlantic competition. There would 
still remain the problem of what conditions will 
exist when the period of reconstruction is com- 
pleted, or of what will be the course of wages in 
this country. Demands for an increase have 
been greatly emphasized during the more recent 
months of war. But I have shown at least 
that the question, whether Europe will not in- 
stantly "dimip" its products on our home mar- 
kets and in our export field, at prices with which 
American industry cannot compete, is by no means 
one-sided. It cannot be safely determined in ad- 
vance by the precedent of older wars. How many 
circumstances peculiar to the present war sur- 
roimd it, may be judged from the single fact that 
experienced students of the immigration problem 
have frankly confessed their inability to decide 
what will be the probable outcome in that field — 
an imprecedented rush of European peasants and 
laborers to the United States, to escape, once for 
all, the horrors of militant Eiu*ope; or wages in 
industrial Europe, high enough to retain its la- 
borers, or, possibly, outright governmental em- 
bargo on emigration from the countries of conti- 
nental Europe. That expedient would be new 
to Europe's history, yet no more unprecedented 
than many another expedient already actually 
adopted, in the war period itself. 



242 EUROPE AND AMERICA 

Such are the interesting and unusual elements 
of uncertainty which surround the question of 
the conditions which, in our own coimtry as in 
belligerent Europe, will arise with return of peace. 
It is undoubtedly fortunate that the American 
people themselves have lent a readier ear to pre- 
diction of possible danger than to prediction of 
unchecked American prosperity. Merchants and 
manufacttirers who have been gaining the largest 
profits have been the most conservative in guard- 
ing their financial position against the possible 
great reaction. Speculation on the stock exchanges 
as, not only in shares of war munition manufac- 
tories but in securities of companies conducting 
the business of ordinary times, was held in check 
even at the height of the rise in prices diur- 
ing 191 5. If the misgivings expressed so widely 
regarding the economic sequel in the United 
States were all to be fulfilled in the event, the 
result would at least not take our financial and 
industrial community unprepared. 

The country itself is prepared In still other 
ways for whatever vicissitudes the aftermath of 
war may bring to it. The undoubtedly immense 
expansion of credit has been based on an unprece- 
dented accumulation of gold. The abnormally 
great increase of our exports to belligerent Europe 
has been offset by repurchase of possibly the 
greater part of the securities representing our 



A NEW WORLD 243 

standing indebtedness to the outside world. If 
the strain of economic reconstruction in Europe 
is to affect the American money market, we have 
the machinery of a sound and scientific banking 
system, with its facilities ready for instant use 
and as yet hardly employed. It is these well- 
known facts which are the basis for the state- 
ment, by one of the most experienced members of 
the Federal Reserve Board, that "the United 
States have so strengthened their economic posi- 
tion among the nations of the world that, to a 
substantial extent, they must take the place of 
the European nations which acted as the world's 
bankers before the war." 

Out of the numerous predictions made when 
the war broke out — most of which, as we have 
learned in the course of our narrative, turned out 
to be mistaken — ^the one prediction accepted unan- 
imously by thoughtful men was that the world 
which emerges from this epoch-making conflict 
will not be the world which we knew before 19 14. 
This prediction was most frequently made of 
political institutions and relations; sometimes of 
social institutions. It may be ventured quite as 
safely in regard to economic institutions and re- 
lations. The spirit in which the United States 
will meet the test of these new conditions may 
reasonably be one of soberness, but of hope and 
confidence. 



INDEX 



Aftermath of war, political problems 
of, 2; difficulties of, due to 
war-time paper inflation, 161, 
162; probable incidents of, I gi- 
194; its character, in other wars, 
195,196; in period after Water- 
loo, 197; conditions governing, 
on present occasion, 198-201; 
probable character of, in France, 
20s; in Germany, 206-210; in 
England, 210-215; trade pro- 
gramme of Germany's enemies 
regarding, 217-224; possible 
economic incidents of, 235; in 
other wars, 235, 236; in the 
U. S., 242, 243. 

Aldrich-Vreeland currency law, its 
origin and purpose, 86; its op- 
eration in 1914, 87, 88; Eng- 
land's plans for a similar cur- 
rency, 87; increase of, during 
early months of war, 104; final 
retirement of, 107, 155. 

American securities, Europe's hold- 
ings of, predictions of 1914 re- 
garding, 17; effort of Europe 
to sell, in 1914 panic, 82; char- 
acter of seUing, when stock ex- 
change reopened, 83; New 
York's repurchases of, from 
Europe, 132, 135, 152; sales of, 
to Europe before the war, 152; 
London's sales of, in first two 
years of war, 175; estimate of 
European holdings of, in 1914 
, and 1915, 175; EngHsh holdings 
of, bought or borrowed by 



British treasury, 175, 176; 
French Government's purchases 
of, 176; used in New York as 
collateral for British Govern- 
ment loan, 176; effect, on Lon- 
don's economic future, of their 
resale to U. S., 213; redemp- 
tion of, its influence on economic 
future of U. S., 242. 

Anglo-French loan of 191 5, commis- 
sion sent to U. S. to arrange, 
170; amount proposed at $1,- 
000,000,000, 170; reduced to 
$500,000,000, 171; terms of, 
171; American market's atti- 
tude toward, 171, 172; its pri- 
mary purpose, 173; its effect on 
foreign exchange, 173; pro- 
ceeds of, how expended, 173, 
174; its investment status, 174. 

Asquith, H. H., British premier, 
statement of 19 15 on peace 
proposals, 184, 185; intimates 
possible terms, 189. 

Austria, her ultimatum to Servia, 
21; financial panic in, 29; de- 
preciation of exchange rates on, 
167. 

Balkan War of 1912 and 1913, 
hoarding of gold during, 26; 
effect of, on European money 
markets, 27; how terminated, 
190. 

Bank Act, previous suspension of, 
at London, 37; suspension au- 
thorized in 1914 but refused, 38. 



24s 



246 



INDEX 



Bank checks, increased amount of 
drawn in 1915 in U. S., 135; all 
records surpassed by, 136. 

Bank of England, run on, at out- 
break of war, 34; peculiar cir- 
cumstances of run, 34, 35 ; loss 
of gold in panic week, 35; raises 
its rate to 10 per cent, 38; re- 
duces it, 38; takes over non- 
collectible bankers' bills, 49; 
its loans during war, 50, 51; 
establishes Canadian branch, 
100; increase in gold during 
early months of war, 123; heavy 
decrease in gold holdings, dur- 
ing 1915, 124; slight increase 
in note circulation, during war, 
146; relation of, to London's 
gold exports in the war, 170; 
when gold payments were re- 
sumed by, after Napoleonic 
wars, 201. 

Bank of France, war loans to govern- 
ment and note issues, 148. 

Banks, European, reduction of rates 
at, early in 1914, 28; issue of 
paper currency by, 148; prob- 
lems of note issues, after peace, 
200. 

Banks of N. Y. City, decrease in re- 
serves of, during war panic, 87 ; 
unite to pay the city's European 
debt, 99; organize to ship gold 
against our foreign indebted- 
ness, 100; moral effect of their 
action, 10 1 ; surplus reserve re- 
stored, 112. 

Belgium, possible effect of Germany's 
action in, on conditions after 
war, 216; Allies pledge eco- 
nomic assistance to, 218. 

Bethmann-Hollweg, German imperial 
chancellor, statement of 1915 
on peace proposals, 184, 185; 
intimates possible terms, 189. 

Blockade, in Europe during Napole- 
onic wars, 8, 13; of Germany ia 



this war, economic influence of, 
206. 
"Bullion Committee" of 1809; its 
report on depreciation of ex- 
change in war time, 181. 

Canada, gold shipped to, in 1914, 
by New York, 100; sends gold 
back in 1915, 124; loans to, by 
New York, 132. 

Civil War in America, financial 
events at outbreak of, 4; eco- 
nomic character of, 5; cost per 
day, 9; war loans of, 61, 65; 
increase of taxation in, 71; gold 
premium and paper deprecia- 
tion in, 120; character of stock 
market during, 134; inflation of 
currency in, 144, 14s; issue of 
smaU paper money in, 161; 
premature proposals for peace 
in, 185, 186; economic sequel 
to, in the North, 196; in the 
South, 197; demand for South's 
subjugation as result of, 225; 
reason for reconciliation after, 
226. 

Clearing-house certificates of N. Y. 
banks, origin and purpose of, 
84; issue of, in 19 14, 85; re- 
tirement of, 108, 112. 

Consols, British, their decline in Na- 
poleonic wars, 12; their fall on 
eve of this war, 30. 

Cooke, Jay, his method of floating 
U. S. war loan, 61. 

Cost of war, influence of, on popidar 
expectations, 3; estimates be- 
fore this war, 9; amount of, in 
this war, 54; Germany's the- 
ories of meeting, 68; propor- 
tion met in England by taxes, 

71. 
Cotton, American producers of, 
dilemma at outbreak of war, 
90; expedients to relieve, 91; 
effect of Civil War on produc- 



INDEX 



247 



tion of, IQ7; probable revival in 
market for, after this war, 228. 
Currency issues during war, in Eng- 
land, 44; nature and amount 
of, 45 ; recourse to, by other na- 
tions, 51; in Germany, France, 
and Russia, 145; in England, 
146; character of, 147, 148; ef- 
fects of, on the markets, 140, 
150; problem of, after the war, 
200. 



Debts of belligerent states, 57, 58; 
see also War loans. 

Duration of the war, predictions re- 
garding, I. 

Economic Conference of the Allies at 
Paris in 191 6; its plans for 
pohcy after war, 218-225; 
pledges assistance to Belgium, 
Servia, and Poland, 218; agrees 
on defensive economic mea- 
sures; intimates permanent anti- 
German policy, 220, 221; Wash- 
ington's view regarding, 221; 
motive of its proposals, 222, 
224; objections to them, 223, 
224. 

"Economic exhaustion," popular 
theory of, 61; probabilities re- 
garding, 62; Macaxilay on, 63; 
precedent of other wars regard- 
ing, 65. 

"Economic invasion," by Europe 
after war, predictions of, 233- 
241 ; of Europe by Asia, theory 
of, 233; of Europe by America, 
predicted in 1897, 234; of out- 
side world by England, after 
Napoleonic wars, 236. 

Economic War, see Economic Con- 
ference. 

England, attitude of 191 1 toward 
France and Germany, 26; cur- 
rency of, in 1 9 14 panic, 34, 44, 



45 ; war taxation of 1914 in, 69; 
enormous increase of taxes in, 
70, 71; her shaken economic 
prestige, 118; commission from, 
to confer on American situation, 
123; increase of paper currency 
in, during 1915 and 1916, 146; 
depreciation in exchange on, 
167; causes of, 168; places$5oo,- 
000,000 Anglo-French loan, 
170; its holdings of American 
securities, 175; government of, 
buys or borrows foreign securi- 
ties from English investors, 176; 
borrows $250,000,000 on col- 
lateral security at New York, 
176; her economic position 
after Transvaal War, 195; after 
Napoleonic wars, 199; position 
of, on outbreak of this war, 202; 
origin of her financial and in- 
dustrial prestige, 209; impair- 
ment to prestige of, during this 
war, 21 1-2 13; financial history 
of, in Napoleonic wars and in 
this one, 211; position after 
war, compared with other Eu- 
ropean states, 212; reasons for 
and against maintenance of 
former position, 213, 214; polit- 
ical power of, as shown by this 
war, 215; her trade with Ger- 
many before the war, 216; as- 
pects of her future economic 
policy toward Germany, 224; 
relations with U. S. after War 
of 1812, 226; attitude toward 
U. S. during Napoleonic wars, 
232; Continent's attitude to- 
ward, in Franco-Prussian War, 
232; her large exports, after 
Napoleonic wars, 236; hard 
times in, during decade after 
Waterloo, 237. 
Europe, political and economic 
status of, in this war, 2, 3 ; ex- 
pected movement of gold to, 



248 



INDEX 



18; settlement of American 
debt to, 102; large loans to, by 
American markets, 132; war- 
time currency inflation in, 145- 
146; rise of commodity prices 
in, 150; issue of small paper 
currency in, 161; estimated 
holdings of American securities 
in, 161, i7s; economic condi- 
tion of, after Napoleonic wars, 
197; Lloyd-George's prediction 
as to post-bellum economic re- 
action in, 201; futiure relation 
of nations in, 201-225; finan- 
cial expedients of 1914 in, not 
new, 210; possible "dumping" 
of cheap merchandise by, after 
war, 228; poUtical attitude 
toward U. S., on return of 
peace, 232; its former fears of 
"economic invasion" by Asia 
and the U. S., 233, 234; hard 
times in, after Napoleonic wars, 
236, 237; economic needs of, 
after this war, 238; future atti- 
tude of, toward immigration to 
U. S., 241. 
Export trade, of the U. S., decrease 
of at beginning of war, 89; 
enormous increase of, during 
1915, 128; destination of, 128; 
influence of, on the foreign ex- 
changes, 153; imlikely to con- 
tinue at war-time size after war, 
227; predictions as to character 
of, on return of peace, 239. 

Federal Reserve Law, its enactment, 
104; its provisions, 105-107; 
put into operation, 107; its 
effect on financial sentiment, 
108; cmrrency issues under, 155, 
156; unexpected character of 
such issues, 157; possibiUties of 
future inflation imder, safe- 
guards against, 158; future in- 
fluence of, on American money 



rates, 160; importance of, to 
economic future of U. S., 243. 

Fiat money, not largely resorted to 
in this war, 73 ; reasons against 
using, 73; wherein currency 
issues in Eiurope differed from, 
147, 148. 

Foreign exchange, violent movement 
of in 1914, against New York, 
92; rate of $7 touched for ster- 
ling, 93; economic significance 
of the rate, 93; turn in favor 
of New York, 123, 124; Lon- 
don's view of, as an index to 
prosperity, 133; effect of Eu- 
rope's currency inflation on, 149, 
150; premium on, in 1915 at 
New York, 151; violent move- 
ments of 19 1 5 in, 163; prin- 
ciples imderlying, 165; action 
of, in normal times, 166; effect 
of, on gold exports, 166; spec- 
tacular dechne of 1915 in, 167; 
depreciation of, on London, 
Paris, Berlin, Vienna and Petro- 
grad, 167; causes of movement 
of, against London, 168; against 
France, 168, 169; how affected 
by return of American tourists, 
168; influence on, of transfer 
of capital from London, 169; 
effect on, of $500,000,000 Anglo- 
French loan, 173; recovery of, 
at London, 177; continued de- 
preciation of, at Paris, 177; con- 
tinuous movement of, against 
Germany, 178; causes for, 178, 
181; influence of paper infla- 
tion on, 180; course of, in 
Napoleonic wars, i8r. 

France, hoarding of money in, on 
eve of war, 26; war loans of, 57, 
58; absence of heavy war taxa- 
tion in, 72; her purchase of 
American securities before the 
war, 79; her economic position 
in the first year of war, 118; 



INDEX 



249 



asks her citizens to give up gold, 
122; amount received, 122; in- 
flation of currency in, 145; issue 
of small paper currency in, 161; 
depreciation of exchange on, 
167; causes of, 168, 169; co- 
operates in Anglo-French loan, 
170; government of, buys or 
borrows foreign securities from 
French investors, 176; places 
$100,000,000 loan at New York, 
176; its holdings of American 
securities, 177; economic con- 
dition of, in 191 5, 177; views 
of, regarding terms of peace, 
18s; her position in relation to 
other states before the war, 202; 
her economic weakness during 
the war, 203; reasons for, 204; 
her rapid economic recovery 
after other wars, 205 ; explana- 
tion of, 206; economic condi-- 
tion of, under Napoleon, 208" 
historical origin of her economic 
capacities, 209; German trade 
with, afterFranco-Prussian 
war, 216; predictions of her re- 
lations with England after Na- 
poleonic wars, 225; probable 
nature of trade with U. S., after 
war, 240; question of future 
labor costs in, 240; commission 
from, on international trade 
after war, visits U. S., 240. 
Franco-Prussian War of 1870, cost 
of, per day, 9; circumstances of 
outbreak, 25; economic conse- 
quences of, to Germany, 195; 
trade between France and Ger- 
many, at conclusion of, 214; 
attitude of Continent toward 
England in, 232. 

Germany, her exactions from Bel- 
gium, 11; money hoarding in, 
on eve of war, 26; threats of 
191 1 against France, 26; war 



loans of, 56, 58; her method of 
raising them, 60; her ideas as 
to financing war, 68; her new 
taxes, 72; her success in raising 
war loans, 119; asks her citizens 
to give up gold, 121; amount 
collected by her, 121; economic 
problems of, after the war, 161; 
depreciation of exchange on, 
167, 178; influence of blockade 
on, 178, 179; effects of currency 
inflation in, 180; places $25,- 
000,000 loan at New York, 182; 
attitude of New York toward 
loans of, 182; her government's 
attitude toward peace, 184; 
war policies of, as obstacle to 
peace, 186; her government's 
attitude toward peace, 189; her 
rise in economic prestige after 
Franco-Prussian War, 19s; her 
allegations as to cause of war 
in 1914, 202; threats of, after 
1871, regarding France, 204; 
origin of her economic prestige, 
206; effects of the war on, 206- 
208; her use of foreign capital, 
207; condition of her currency, 
208; her miUtary preparations 
in 1913, 208; her past economic 
history, 209; economic prob- 
lems of, after the war, 210; pre- 
dictions in, regarding future of 
England, 214, 215; economic 
future of, EngUsh threats re- 
garding, 215; trade of, with 
England before the war, 216; 
with France after Franco- 
Prussian War, 216; bitterness 
of feeling against, 217; plans 
of Allies regarding trade with, 
after war, 217-224; future of 
her trade, 223, 224; possible 
change in national character of, 
after this war, 226; diplomatic 
clash with U. S., 229; predic- 
tions of German authorities re- 



250 



INDEX 



garding industrial situation 
after war, 239; question of 
labor and wages, 239. 

Gold, international shipment of, in 
Napoleonic wars, 13; predic- 
tions of ig 14 as to international 
movement of, 18; actual re- 
sults, 19; $10,000,000 ship- 
ment of, in week of war out- 
break, 21; hoarding of, after 
191 1, in Continental Europe, 
26; hoarding of, at London, in 
August, 1 9 14, 34, 36; export of, 
in 1914, by New York, 92, 94; 
use of, in redeeming New York 
City's European loan, 100; 
payment of foreign debts in, 
during war panic, 100; French 
and German Governments ask 
for citizens' holdings of, 119- 
122; reasons for premium on, 
in former wars, 120; reserve of, 
against England's war ciurrency, 
146; usual movement of, in 
war time, 147; absence of pre- 
miiun on, in this war, 149; use 
of, as security for oiur new 
Federal Reserve notes, 157; 
enormous imports of in 1915, 
by U. S., 157; possible re- 
export of, to Europe after the 
war, 159, 162; European ac- 
cumulations of, possible use 
after war, 161; normal influ- 
ence of exports of, on exchange 
rates, 166; large exports of in 
191S and 1916, by London to 
New York, 170; premium on, 
temporarily bid in Germany, 
180, 181; premium on, in 1809 
at London, 181. 

Cold payments, suspension of at New 
York, in 1861, 5; suspension of 
in 1870 at Paris, 33; at London 
in 1797, 33; question of main- 
tenance in 1914, at New York, 
94-97; how maintained, 99- 



102; question of their resump- 
tion, by Europe after war, 161. 

"Gold pool," for adjusting New 
York's foreign obligations in 
October, 1914, 100; nature of 
its operations, 102. 

Government bonds, European, rise in 
price of, before the war, 28. 

Grain crops of the U. S., enormous 
yield of, during 1915, 140; all 
records broken in marketing of, 
140. 

Grey, Sir Edward, British foreign 
minister, prediction of economic 
effect of war, 17; declaration 
in igii to German ambassador, 
26. 

Eelferich, Karl, German finance 
minister, his disapproval of war 
taxes, 68; his view of England's 
war finance, 69; predicts down- 
fall of British Empire, 214, 215. 

Holland, war-time flow of gold into, 
19. 

Immigration from Europe to U. S., 
problems of, after return of 
peace, 241. 

Income tax, English, in Napoleonic 
wars, 6, 9; circmnstances of, 
in 1914, 10; large increase of 
1915 in, 70; raised to 25 per 
cent or higher, 70, 71. 

Indemnity, war, Germany's predic- 
tions regarding, 68. 

Inflation of paper currency, its occur- 
rence in previous wars, 144; 
in the American Civil War, 145 ; 
in the belligerent states during 
this war, 145, 146; nature of, 
147, 148; causes of, in war 
time, 147; effect of, on foreign 
exchange, 149; on prices, 150; 
question as to existence of, in 
the U. S., 151-158; effect of, 
on return of peace, 200, 201. 



INDEX 



251 



International finance, status of, in 
Napoleonic wars, 12, 13, 14; ex- 
pected results of war on, 16, 17. 

Iron production, a measure of na- 
tional prosperity, 137; im- 
mense expansion of, during 191 5 
in the U. S., 138. 

Japan, economic condition of, dur- 
ing Manchurian War, 64, 65; 
American loans of 1904 to, 132; 
how war with Russia was ter- 
minated, 190, 191; depression 
in, after war with Russia, 195. 

Johnson, Andrew, President U. S., 
his plan for repudiating war 
debts, 66. 

Kronprinzessin Cecilie, tiums back 
with $10,000,000 gold on board 
at outbreak of war, 21. 

Labor, problem of, in Europe after 
the war, 239, 240; influence on, 
of future immigration to U. S., 
241. 

Lloyd-George, David, chancellor 
British exchequer, his predic- 
tion as to economic aftermath 
of war, 201. 

London, hoarding of capital in, on 
eve of war, 27; beginning of 
war panic in, 3 1 ; sales of securi- 
ties to, by continental Europe, 
31; stock exchange closes, 32; 
financial position of, at war's 
outbreak, 40; its foreign credits, 
41; effect of moratorium on, 
48; investments by, in new 
foreign loans, prohibited, 59, 
129; predictions of, regarding 
outcome in America, 97, 129; 
sends back gold to New York, 
124; ceases to act as world's 
central market, 129; continues 
to discount for outside world, 
130; foreign deposits trans- 



ferred from, to New York, 131; 
normal foreign exchange market 
in, 16s, 166; violent break of 
New York exchange on, 167, 
168; transfer of capital from, 
to New York, 169; gold ex- 
ports of 191S and 1916 from, 
170; places $500,000,000 Anglo- 
French loan in U. S., 172; bor- 
rows $50,000,000 from New 
York bankers, 174; sales of 
American securities by, in first 
two years of war, 175; depre- 
ciation of exchange on, in Na- 
poleonic wars, 181; position of, 
after 1815, 211; question re- 
garding future position of, as 
world money centre, 212-214; 
reasons why position may be 
retained, 212, 214; basis for 
economic primacy of, 235. 
London Times, protest against peace 
with U. S. in 1814, 225. 

Madison, James, President U. S., 
remark on neutrals and beUig- 
erents, 8. 

Manchurian War of 1904, cost per 
day, 9. 

"Minimum prices," fixed in 1914 by 
N. Y. Stock Exchange, 112; 
removal of, 113. 

Money market, of Europe, in year 
before war, 27, 28; of U. S., 
effect of Anglo-French loan on, 
173. 174- 

Moratorium on debts, in Balkans 
during 191 2, 46; proclaimed in 
England, 47; terms of, 47; 
effects of, 48, 49; expiration of, 
in England, 52; recourse to, 
by other nations, 52; bad effect 
of, on N. Y. market, 94; gen- 
eral abandonment of, in Europe, 
118. 

Morocco incident of 1911, financial 
effects of, 26. 



252 



INDEX 



"Munitions orders" placed by Eu- 
rope in the U. S., 126; value of, 
126; not the main influence of 
IQ15 on railway traflSc, 130, 
140; use of $500,000,000 Anglo- 
French loan in paying for, 174; 
shares of manufacturing com- 
panies in, effect of peace rumors 
on, 189; effect of, on attitude 
toward peace, 193. 

Napoleon, war indemnities levied 
by, 11; rejection of opponent's 
peace proposals by, 186; Prus- 
sian demand for his death after 
Waterloo, 225. 

Napoleonic wars, analogies with this 
war, 5-8; economic conditions 
during, 11-14; proportion of 
war costs in, paid by England 
in taxes, 71; harvest shortage 
and price of wheat in, 124; ex- 
port trade of U. S. during, 127; 
depreciation of exchange on 
London during, 181; problems 
of 1813 in, 186; course of prices 
after ending of, 193, 199; dura- 
tion of economic depression fol- 
lowing, 197, 201; character of 
that depression, 199; economic 
recovery of France after, 205; 
condition of France during, 208; 
England's financial position 
during, 211; prediction of 
Anglo-French relations after, 
225; disputes of neutrals and 
belUgerents in, 229; Europe's 
attitude toward American 
"trade boom" in, 232; large 
imports by U. S. from England 
after, 235, 236; hard times in 
Europe at end of, 236, 237. 

New York, closing of stock exchange 
in, 32, 80, 81, 82; its earlier 
ideas of "displacing London," 
77; experiences of 1 90 1, '7 8; of 
subsequent years, 79; war panic 



in, 83, 84; export of gold from, 
at outbreak of war, 92; violent 
movement of foreign exchange 
against, 92; crisis in policy re- 
garding foreign obligations, 94, 
95 ; its chance of displacing 
London, 97; effect of its main- 
tenance of pajnments, 98; doubts 
over Europe's resale of Ameri- 
can securities, 109; the irreg- 
ular "street market" in, no; 
takes over London's fimctions 
as world money centre, 129; 
provides capital for foreign 
markets, 130, 131; foreign de- 
posits transferred to, from Lon- 
don, 131; its foreign loans of 
1901,132; movement of foreign 
exchange at, during 1915, 163- 
169, 177-180; negotiates $500,- 
000,000 Anglo-French loan, 171; 
lends $50,000,000 to London 
bankers, 174; lends $100,000,- 
000 on collateral security to 
France, and $250,000,000 to 
England, 176; takes $25,000,- 
000 loan from Germany, 182. 
New York City loan, placed in Europe 
before war, 79; difficulties of 
repayment in 1914, 99; method 
of redeeming, 99-101. 

Ocean freight rates during war, rise 
of, 227. 

Ocean trade, in Napoleonic wars, 13, 
14. 

"Orders in Council" during Napo- 
leonic wars, analogy of, with 
191S, 7, 8. 

Panic of July and August, 1914, 
nature of, 24; at Vienna, 29; 
at Berlin, 30; at London, 31, 
34, 3Si 36; critical nature of, at 
London, 39-42; expedients to 
allay, 43-50; at New York, 81- 
8s. 



INDEX 



253 



Peace, discussion of, in igis, by 
European governments, 184; 
Asquith's remark on, 184; 
Bethmann-HoUweg on, 184, 
i8g; French Government's 
views of 19 15 on, 18s; German 
Opposition party on, 185; 
"Ford party " as an incident of, 
185; world's attitude regard- 
ing, 186; position of financial 
markets regarding, 187; ru- 
mors of, in 1915, 189; effect of 
rumors on stock market, 189; 
how brought about in previous 
wars, 190, 191; conflicting 
views concerning conditions at 
return of, 191-194; of Paris, in 
1763, 19s; of Westphalia, 
sequel to, 196; incidents on 
return of, after Napoleonic 
wars, 199. 

Pitt, William, analogy of his subsi- 
dies with this war, 7; his in- 
come tax, 10. 

Poland, Allies pledge future eco- 
nomic assistance to, 218. 

Predictions, of economic results, 
before the war, i, 16, 17, 18; 
of result of war, 22; of previous 
economic episodes, 233, 234; 
of economic sequel to the war, 
237-240; of wages in Europe 
after war, 239, 240; of economic 
future of U. S., 243. 

"Preparedness," origin of the Ameri- 
can movement for, 3, 4; anal- 
ogies to, in attitude of European 
AlUes, 222; nature of propa- 
ganda for, in military field, 
230, 231; in economic field, 
231. 

Prices, of commodities, influence of 
currency inflation on, during 
our Civil War, 145; course of 
in Europe, during this war, 150; 
in the U. S., 193; action of, 
after Waterloo, 193, 199. 



Prussia, her situation after War of 
1870 with France, 195; de- 
mand of, for Napoleon's death 
after Waterloo, 225. 

Railways of the U. S., sudden in- 
crease during 1915, in traffic of, 
139- 

Repudiation of Europe's war debts, 
theories regarding, 66, 67. 

Richet, Charles, estimate of 1904 on 
cost of a European war, 9. 

Roche, Jules, estimate of 1913 on 
cost of a European war, 9. 

Rogers, Thorold, opinion on period 
of reaction after Napoleonic 
wars, 197. 

Rothschild, house of, its origin, 11. 

Runciman, Walter, president British 
Board of Trade, his prediction 
of Germany's condition after 
war, 215. 

Russia, cost of her war with Japan, 
9; depreciation of exchange on, 
167. 

Servia, Allies pledge future economic 
assistance to, 218. 

Seven Years' War, economic and 
political results of, 194, 195. 

Spain, prosperity of, after war with 
U. S., 195. 

Special holidays during London 
panic, 43. 

Sterling exchange, see Foreign Ex- 
change. 

Stock exchange, at London in Napo- 
leonic wars, 12; closing of, at 
Vienna, Brussels, Paris and St. 
Petersburg, in 1914, 20, 30; at 
Berlin, restricts trading, 30; 
at London in 19 14, sales by 
the Continent on, before the 
war, 31; loans made to, 31; 
closing of, 31. 

Stock exchange at New York, closing 
of, in 1914, 32, 80; why neces- 



254 



INDEX 



sary, 8i; reopening of, 82, 83, 
109-112; precautionary mea- 
sures of, no, 112, 113; advance 
in prices on, after reopening, 
113; prolonged rise of 1915 in, 
134; advance in bonds on, 135; 
rise of "war munitions stocks" 
on, 19s; unsettled market of 
1916 in, 230; character of war- 
time speculation on, 242. 
Sweden, war-time flow of gold into, 
ig. 

Tariff policy, of England after war, 
221; possible substitution of, 
for free trade, 235; question of 
use of, by U. S. after war, 235. 

Taxation, Germany's repudiation of, 
as war expedient, 67; in Eng- 
land during 1914, 69; English 
budgets of 19 1 5 and 1916 for, 
70, 71; proportion of Enghsh 
war expenses in 19 16 provided 
by, 71; in Napoleonic wars, 71; 
Germany's plans of igi6 for, 
72; poUcy of France and Russia 
regarding, 72. 

Thackeray, W. M., on relations of 
France and England after Napo- 
leonic wars, 225. 

Thirty Years' War, political and eco- 
nomic results of, 196. 

Transvaal War of 1899, cost per day, 
9; effect of, on England's eco- 
nomic position, 195. 

United States (see also Civil War), in- 
fluence of war on, 75; economic 
relations of, before the war, 76; 
annual indebtedness of, to Eu- 
rope, 77; predictions as to effect 
of war on, 80; gloomy outlook 
of 1914 in, 88; dechne in export 
trade of, 89; crisis in cotton 
section of, 90; shrinkage in 
home trade of, 91; problem of 



European indebtedness, 92; its 
wheat harvest in 1914, 125; 
enormous exports of grain from, 
125; mixnitions orders placed in, 
by Europe, 126; its exports in 
Napoleonic wars, 127; in the 
present war, 128; its loans 
to foreign markets, 129-132; 
financial and industrial pros- 
perity of 1915 in, 132-142; ex- 
change of bank checks in, dur- 
ing 1915, 136; increased iron 
production of, during the war, 
137, 138; large railway traflic 
in, 139; great harvests of 1915 
in, 140; basis of its war-time 
prosperity, 141; its traditional 
"cycle of prosperity," 142; its 
economic dependence on Eu- 
rope before this war, 151, 152; 
previous sales of securities by, 
to Europe, 152; repurchase of, 
in 1914, 152; absence of high 
money in, during second year 
of war, 152; conflicting views 
of war-time prosperity in, 153; 
proof that paper currency was 
not inflated in, 155-158; de- 
crease of paper money circula- 
tion in, during first two years 
of war, 155-156; enormous im- 
ports of gold in 1915, 157; sub- 
scribes in 1915 to $500,000,000 
Anglo-French loan, 172; lends 
$250,000,000 to England, 176; 
economic condition of, after 
Civil War, 196, 197; economic 
prestige of, after 1898, 203; 
reasons for and against its re- 
placing London as the money 
centre, 213, 214; possible future 
effect on, of economic war by 
Allies on Germany, 221, 222, 
224; war-time prosperity in, 
question as to duration of, 227; 
possible European competition 
with, on return of peace, 228; 



INDEX 



255 



probable attitude of Europe 
toward, after the war, 232; pre- 
dicted "economic invasion" of 
Europe by, in 1897, 234; in- 
crease in imports of, from Eu- 
rope after 1815, 23s; predictions 
as to export trade of, after this 
war, 239, 240; industrial com- 
mission sent to, in 1915 by 
France, 240; problems of 
future immigration into, from 
Exirope, 241; attitude of its 
markets during war, 242; eco- 
nomic future of, 243. 

Wages of labor, after the war; in 
England, 238; in Germany, 
239; in France, 240; effect on 
immigration from Europe to 
America, 241. 

War, the European, predictions re- 
garding, 1, 16, 17, 18; precedent 
for economic results, 4-8; ex- 
pected cost of, 9, 10; actual 
cost, 10; its outbreak, 20-22; 
financial markets on eve of, 
25-32; financing of, S3-6i; 
world's attitude toward, in early 
months, 116; events of 1914 in, 
117; controversy as to influ- 
ence of, on American prosperity, 
141; not the sole cause of re- 
viving trade in America, 142; 



suggestions of 19 15 for termi- 
nating, 184, 185; influence of, on 
U. S., 187; conflicting views as 
to effect of its termination, 188, 
191, 192. 

War of 181 2, demand in London 
that it continue, 225; large ex- 
ports to U. S. from England 
after end of, 236. 

War loans, in England before 1914, 
56; in England during this war, 
56; in Germany, 56; in France, 
57; by England and France to 
their allies, 57; outstanding 
total of, 58; how raised, 58-61; 
of England, during i8th century, 
63; question of future repudia- 
tion of, 66; interest on, paid by 
Germany through new loans, 
72; Anglo-French borrowing of 
$500,000,000 in U. S., 170-174; 
French borrowing of $100,000,- 
000 from New York, 176; Eng- 
land's collateral loan for $250,- 
000,000, 176. 

t^Aea/, American harvest of, in 1914, 
89; effect of war on price of, 
124; in Napoleonic times, 124; 
world's harvest of, in first year 
of war, 125; enormous Ameri- 
can exports of, 126; influence of 
blockade of Russia on market 
for, 195- 



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